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Demand and Welfare Analysis in Discrete Choice Models under Social Interactions

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  • Bhattacharya, D.
  • Dupas, P.
  • Kanaya, S.

Abstract

Many real-life settings of consumer-choice involve social interactions, causing targeted policies to have spillover-effects. This paper develops novel empirical tools for analyzing 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 establish the connection between econometrics of large games and Brock-Durlauf-type interaction models, under both I.I.D. and spatially correlated unobservables. We develop new convergence results for associated beliefs and estimates of preference-parameters under increasing-domain spatial asymptotics. Next, 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 illustrate our results using experimental data on mosquito-net adoption in rural Kenya.

Suggested Citation

  • Bhattacharya, D. & Dupas, P. & Kanaya, S., 2018. "Demand and Welfare Analysis in Discrete Choice Models under Social Interactions," Cambridge Working Papers in Economics 1885, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1885
    Note: db692
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    References listed on IDEAS

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    1. Áureo de Paula, 2015. "Econometrics of network models," CeMMAP working papers 52/15, Institute for Fiscal Studies.
    2. William A. Brock & Steven N. Durlauf, 2001. "Discrete Choice with Social Interactions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(2), pages 235-260.
    3. Bhattacharya, Debopam & Dupas, Pascaline, 2012. "Inferring welfare maximizing treatment assignment under budget constraints," Journal of Econometrics, Elsevier, vol. 167(1), pages 168-196.
    4. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    5. Debopam Bhattacharya, 2015. "Nonparametric Welfare Analysis for Discrete Choice," Econometrica, Econometric Society, vol. 83, pages 617-649, March.
    6. Debopam Bhattacharya & Pascaline Dupas & Shin Kanaya, 2013. "Estimating the Impact of Means-tested Subsidies under Treatment Externalities with Application to Anti-Malarial Bednets," Economics Series Working Papers 646, University of Oxford, Department of Economics.
    7. Giuseppe De Luca, 2008. "SNP and SML estimation of univariate and bivariate binary-choice models," Stata Journal, StataCorp LP, vol. 8(2), pages 190-220, June.
    8. Brock, William A. & Durlauf, Steven N., 2007. "Identification of binary choice models with social interactions," Journal of Econometrics, Elsevier, vol. 140(1), pages 52-75, September.
    9. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
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    Cited by:

    1. Debopam Bhattacharya & Tatiana Komarova, 2021. "Incorporating Social Welfare in Program-Evaluation and Treatment Choice," Papers 2105.08689, arXiv.org, revised Nov 2022.
    2. Babcock, Philip & Bedard, Kelly & Fischer, Stefanie & Hartman, John, 2020. "Coordination and contagion: Individual connections and peer mechanisms in a randomized field experiment," Journal of Public Economics, Elsevier, vol. 185(C).

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