Identification of Social Interactions through Partially Overlapping Peer Groups

Abstract

In this paper, we demonstrate that, in a context where peer groups do not overlap fully, it is possible to identify all the relevant parameters of the standard linear-in-means model of social interactions. We apply this novel identification structure to study peer effects in the choice of college major. Results show that one is more likely to choose a major when many of her peers make the same choice. We also show that peers can divert students from majors in which they have a relative ability advantage, with adverse consequences on academic performance, entry wages, and job satisfaction. (JEL I23, J24, J31, Z13)

Peer Effects on Undergraduate Business Student Performance

“…The construction of our model as well as the significance of the endogenous peer effect is consistent with De Giorgi et al (2010). However, the direction of the effect found is contrary to some peer effects studies (De Giorgi et al, 2010;Hanushek et al 2003). Nonetheless, Zimmerman (2003), Sacerdote (2001), and Henderson et al (1978) show that the direction of the peer effect may be a function of the interaction between one's own ability and that of peers.…”

“…Our results show that the endogenous peer effects are significant and negative. The construction of our model as well as the significance of the endogenous peer effect is consistent with De Giorgi et al (2010). However, the direction of the effect found is contrary to some peer effects studies (De Giorgi et al, 2010;Hanushek et al 2003).…”

“…In particular, we measure the peer effect on student grades. This study utilises an exclusion restriction approach similar to De Giorgi et al (2010) to estimate the endogenous peer effect. Our results support the finding that a student's classroom performance has a significant effect on their peers.…”

“…Group C, whose members indirectly influence A, is known as the excluded group. De Giorgi et al (2010) use a set of academic courses common to several peer groups to show that indirect peer effects influence a student's choice of college major.…”

“…Our analysis consists of measuring the endogenous effect that the average performance of one group of peers has on another group of students. We employ an exclusion restriction identification approach (De Giorgi et al, 2010). Our estimating strategy is to evaluate the effect that one group of students has on another but where there is no shared direct interaction.…”