E.L. Gaeser and J.A. Scheinkman

A Brief Summary


Identifying Social Interactions

Inequality, concentrations of poverty and other outcomes may be the partial result of social interactions. Thus interventions that seek to address these phenomena may operate through both their incentives upon individual actors and through these social interactions. However, as policies are generally aimed at the former, it is difficult to quantify the effect, if any, the policy has through social networks. Whilst theory abounds that attests to the effect these interactions can have on the distribution of private outcomes, simply studying the outcomes tells us nothing about whether it was the interactions, or the private incentives that were responsible.


Different methods have been used to identify the interactions. One way is to look for multiplier effects, i.e. identifying the social effects as those operate above and beyond the private effect. However this requires being able to state exactly what the private effects should be in order to look at the difference, and this is generally not possible. A more promising approach looks at the results of interventions that operate directly on the social interactions and not on the private incentives. Three approaches are relevant:

  1. Interventions that change group membership. If group membership is changes (with no change to private incentive), then any changes in outcome could plausibly be attributed to the group effect. The problem here is that private incentives often change alongside, and it is often hard to enforce such that individuals simply do not revert back to their original groupings.
  2. Changing the private incentives for a sub-set and seeing if there are effects on others whose private incentives are not changed.
  3. Interventions that seek to directly challenge social norms such as mass media campaigns. The identification issue here is that the changes may simply affect private preferences rather than acting directly upon the social norms.

Econometric identification of social interactions is very hard, and perhaps the strongest evidence for these phenomena are the persistent degrees of stratification amongst populations.


Econometric Possibilities

The basic concept of social interactions is that one individual’s actions are made based in part upon the actions of another individual or grouping of individuals. Various techniques are used to empirically test these interactions [see later summaries for spatial context]. In general however, these specifications are subject to three problems:

  1. Simultaneity: A’s actions may be affected by B’s, but B’s will most likely be affected by A’s at the same time. This means that any regression that includes B’s actions as an explanation of A’s will suffer from endogeneity. Endogenous and exogenous interactions cannot be separately identified.
  2. Correlated unobservables problem and the related errors in variables problem. This arises is there is some group specific component of the error term that varies across groups and is correlated with the exogenous characteristics of the individuals. The unobservables could arise from preferences, or environmental settings.
  3. Endogenous membership problem – people may sort into groups based on unobservable characteristics. This is similar to selection bias.


The challenge then is to see whether these issues that can generally be lumped together as endogeneity issues, can be circumvented using techniques such as instrumental variables, quasi-experiments, or randomized control trials.


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