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Peer Effects in Random Consideration Sets

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Document pages: 36 pages

Abstract: This paper develops a dynamic model of discrete choice that incorporates peereffects into random consideration sets. We characterize the equilibriumbehavior and study the empirical content of the model. In our setup, changes inthe choices of friends induce changes in the distribution of the considerationsets. We exploit this variation to recover the ranking of preferences, theattention mechanisms, and the network connections. These identification resultsallow unrestricted heterogeneity across people and do not rely on variation ofeither covariates or the set of available options. Our methodology leads to amaximum-likelihood estimator that performs well in simulations.

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