Working Paper: NBER ID: w22565
Authors: Bet Caeyers; Marcel Fafchamps
Abstract: We examine a largely unexplored source of downward bias in peer effect estimation, namely, exclusion bias. We derive formulas for the magnitude of the bias in tests of random peer assignment, and for the combined reflection and exclusion bias in peer effect estimation. We show how to consistently test random peer assignment and how to estimate and conduct consistent inference on peer effects without instruments. The method corrects for the presence of reflection and exclusion bias but imposes restrictions on correlated effects. It allows the joint estimation of endogenous and exogenous peer effects in situations where instruments are not available and cannot be constructed from the network matrix. We estimate endogenous and exogenous peer effects in two datasets where instrumental approaches fail because peer assignment is to mutually exclusive groups of identical size. We find significant evidence of positive peer effects in one, negative peer effects in the other. In both cases, ignoring exclusion bias would have led to incorrect inference. We also demonstrate how the same approach applies to autoregressive models.
Keywords: Peer Effects; Exclusion Bias; Estimation Methods
JEL Codes: C31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exclusion bias (J15) | downward bias in the estimation of peer effects (C92) |
| random peer assignment (C90) | exclusion bias (J15) |
| selection pool fixed effects (C23) | exclusion bias (J15) |
| size of the selection pool (C52) | exclusion bias (J15) |
| exclusion bias (J15) | negative correlation between individual characteristics and peer characteristics (C92) |
| exclusion bias (J15) | biased OLS estimates of peer effects (C92) |
| proposed estimation methods (C51) | correct for exclusion and reflection bias (C83) |
| failure to account for exclusion bias (C34) | incorrect inferences about peer effects (C92) |
| exclusion bias (J15) | incorrect inferences in empirical datasets (C55) |