Department of Economics and Business Economics

Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

Research output: Working paperResearch

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  • rp19_09

    Final published version, 2 MB, PDF-document

  • Debopam Bhattacharya, University of Cambridge, United Kingdom
  • Pascaline Dupas, Stanford University, Stanford, CA, United States
  • Shin Kanaya
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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages87
Publication statusPublished - 15 May 2019
SeriesCREATES Research Papers
Number2019-09

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ID: 153229349