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Faculty of Economics

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Bhattacharya, D., Dupas, P., Kanaya, S.

Demand and Welfare Analysis in Discrete Choice Models under Social Interactions

CWPE1885

Abstract: 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.

Author links: Debopam Bhattacharya  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1885.pdf

Open Access Link: https://doi.org/10.17863/CAM.36010