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Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

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  • Debopam Bhattacharya
  • Pascaline Dupas
  • Shin Kanaya

Abstract

Many real-life settings of individual choice involve social interactions, causing targeted policies to have spillover effects. This article develops novel empirical tools for analysing demand and welfare effects of policy interventions in binary choice settings with social interactions. Examples include subsidies for health-product adoption and vouchers for attending a high-achieving school. We show that even with fully parametric specifications and unique equilibrium, choice data, that are sufficient for counterfactual demand prediction under interactions, are insufficient for welfare calculations. This is because distinct underlying mechanisms producing the same interaction coefficient can imply different welfare effects and deadweight-loss from a policy intervention. Standard index restrictions imply distribution-free bounds on welfare. We propose ways to identify and consistently estimate the structural parameters and welfare bounds allowing for unobserved group effects that are potentially correlated with observables and are possibly unbounded. We illustrate our results using experimental data on mosquito-net adoption in rural Kenya.

Suggested Citation

  • Debopam Bhattacharya & Pascaline Dupas & Shin Kanaya, 2024. "Demand and Welfare Analysis in Discrete Choice Models with Social Interactions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 748-784.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:2:p:748-784.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad053
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    Cited by:

    1. Davide Viviano, 2019. "Policy Targeting under Network Interference," Papers 1906.10258, arXiv.org, revised Apr 2024.
    2. Davide Viviano & Jess Rudder, 2020. "Policy design in experiments with unknown interference," Papers 2011.08174, arXiv.org, revised May 2024.
    3. Michael P. Leung, 2020. "Equilibrium computation in discrete network games," Quantitative Economics, Econometric Society, vol. 11(4), pages 1325-1347, November.
    4. Wilfried Youmbi, 2024. "Nonparametric Analysis of Random Utility Models Robust to Nontransitive Preferences," Papers 2406.13969, arXiv.org.

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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H4 - Public Economics - - Publicly Provided Goods
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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