Working Paper: NBER ID: w25947
Authors: Debopam Bhattacharya; Pascaline Dupas; Shin Kanaya
Abstract: Many real-life settings of individual 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 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 propose ways to identify and consistently estimate the structural parameters and welfare bounds allowing for unobserved group effects that are potentially correlated with observables and are possibly unbounded. We illustrate our results using experimental data on mosquito-net adoption in rural Kenya.
Keywords: demand analysis; welfare analysis; social interactions; policy interventions; spillover effects
JEL Codes: C31; C35; C57; H23; I38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| traditional demand prediction methods (C69) | welfare calculations (I38) |
| distinct mechanisms producing the same interaction coefficient (C20) | different welfare implications (I30) |
| subsidizing mosquito net adoption (F35) | welfare effects (D69) |
| spillover impacts perceived as positive or negative (F69) | welfare effects (D69) |
| choice data (C25) | demand effects (H31) |
| welfare effects not identifiable (D69) | complexity of welfare analysis (D69) |
| channels of spillover effects (F42) | varying welfare outcomes (I38) |