Binary Choice Models with Social Network under Heterogeneous Rational Expectations

Citation

Lee, Lung-fei; Li, Ji; & Lin, Xu (2013). Binary Choice Models with Social Network under Heterogeneous Rational Expectations. Review of Economics and Statistics. vol. 96 (3) pp. 402-417

Abstract

This paper extends Brock and Durlauf's (2001a, 2001b) binary choice complete network (or group interaction) model with homogeneous rational expectations to a general network model with heterogeneous rational expectations. In our model, individuals will form expectations regarding peers' behaviors taking into account their characteristics. Endogenous, contextual and correlated effects are all identifiable. Conditions for unique equilibrium are established. For a complete network with heterogeneous rational expectations, multiple equilibria can be characterized by an aggregate scalar index. The empirical results on adolescents' smoking behaviors show significant endogenous and contextual effects, even after controlling for school-grade random effects and school fixed effects.

URL

http://dx.doi.org/10.1162/REST_a_00401

Reference Type

Journal Article

Journal Title

Review of Economics and Statistics

Author(s)

Lee, Lung-fei
Li, Ji
Lin, Xu

Year Published

2013

Volume Number

96

Issue Number

3

Pages

402-417

DOI

10.1162/REST_a_00401

Reference ID

4509