Discussion Paper Details

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Title: Toward a General Theory of Peer Effects

Author(s): Vincent Boucher, Michelle Rendall, Philip Ushchev and Yves Zenou

Publication Date: May 2022

Keyword(s): Conformism, peer effects, policies, Spillovers and structural estimation

Programme Area(s): Public Economics

Abstract: There is substantial empirical evidence showing that peer effects matter in many activities. The workhorse model in empirical work on peer effects is the linear-in-means (LIM) model, whereby it is assumed that agents are linearly affected by the mean action of their peers. We provide two different theoretical models (based on spillovers and on conformism behavior) that microfound the LIM model and show that they have very different policy implications. We also develop a new general model of peer effects that relaxes the assumptions of linearity and mean peer behavior and that encompasses the spillover, conformist model, and LIM model as special cases. Then, using data on adolescent activities in the U.S., we structurally estimate this model. We find that for GPA, social clubs, self-esteem, and exercise, the spillover effect strongly dominates, while for risky behavior, study effort, fighting, smoking, and drinking, conformism plays a stronger role. We also find that for many activities, individuals do not behave according to the LIM model. We run some counterfactual policies and show that imposing the mean action as an individual social norm is misleading and leads to incorrect policy implications.

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Bibliographic Reference

Boucher, V, Rendall, M, Ushchev, P and Zenou, Y. 2022. 'Toward a General Theory of Peer Effects'. London, Centre for Economic Policy Research.