Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

Debopam Bhattacharya, Pascaline Dupas, Shin Kanaya

Publikation: Working paper/Preprint Working paperForskning

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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 healthproduct 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 deadweightloss 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.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider87
StatusUdgivet - 15 maj 2019
NavnCREATES Research Paper


  • Policy targeting, welfare analysis, social interaction, spillover, externality, convergence of Bayesian-Nash equilibria, spatial dependence, Kenya