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

Demand and Welfare Analysis in Discrete Choice Models under Social Interactions


Abstract: We develop tools for empirical welfare-analysis in binary choice models with social interactions. We show that even under parametric preferences and a unique equilibrium, typical cross-sectional datasets contain inadequate information for exact welfare analysis when interactions are present. Identification failure arises from potential dependence of non-purchase utility on aggregate purchase-rate. However, in Brock-Durlauf-type single-index settings, the distribution of welfare-effects resulting from price-interventions can be bounded; the bounds. Width increases in (i) the strength of aggregate spillover and (ii) the impact of policy-induced price- change on average choice. We illustrate our results using experimental data on mosquito-net adoption in rural Kenya. We show that under interaction, the same estimated choice probability function is consistent with both a positive and a negative net welfare effect of a means-tested subsidy, in turn implying very different deadweight-loss estimates. Ignoring interactions would also imply over (under)-estimation of demand at less (resp, more) generous eligibility-rules.

Author links: Debopam Bhattacharya  


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