| Abstract: |
This paper tackles the issue of self-selection in social interactions models.
I develop a theory of sorting and behavior, when the latter is subject to
social influences, extending the model developed by Brock and Durlauf (2001a,
2003) to allow for equilibrium group formation. Individuals choose a group,
and a behavior subject to an endogenous social effect. The latter turns out to
be a segregating force, and stable equilibria are stratified. The sorting
process may induce, inefficiently, multiple behavioral equilibria. Such a
theory serves as a means to solve identification and selection problems that
may undermine the empirical detection of social effects on individual
behavior. I exploit the theoretical model to build a nonlinear (in the social
effect) selection correction term. Such a term allows identification, and
solves the selection problem that arises when individuals can choose the group
whose effect the researcher is trying to disentangle. The resulting
econometric model, although relying on strict parametric assumptions,
indicates a viable alternative when reliable instrumental variables are not
available, or randomized experiments not possible. |