Keeping up with peers in India. A new social interactions model of perceived needs
We propose a new nonlinear model of social interactions. The model allows point identification of peer effects as a function of group means, even with group level fixed effects. The model is robust to measurement problems resulting from only observing a small number of members of each group, and therefore can be estimated using standard survey datasets. We apply our method to a national consumer expenditure survey dataset from India. We find that each additional rupee spent by one’s peer group increases one’s own perceived needs by roughly 0:5 rupees. This implies that if I and my peers each increase spending by 1 rupee, that has the same effect on my utility as if I alone increased spending by only 0:5 rupees. Our estimates have important policy implications, e.g., we show potentially considerable welfare gains from replacing government transfers of private goods with the provision of public goods.
Link to paper: https://www2.bc.edu/arthur-lew<wbr />bel/peer45.pdf