Discussion paper

DP13707 Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

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.


Bhattacharya, D, P Dupas and S Kanaya (2019), ‘DP13707 Demand and Welfare Analysis in Discrete Choice Models with Social Interactions‘, CEPR Discussion Paper No. 13707. CEPR Press, Paris & London. https://cepr.org/publications/dp13707