Abstract
Designing interventions aimed at fostering peer effects in schools requires knowledge of how individuals endogenously sort into groups. We propose a theoretical model where agents form groups endogenously and their outcomes are affected accordingly. Using a popular payoff structure, we show that equilibrium outcomes are consistent with the linear-in-means model used to empirically study peer effects, and we characterize the set of stable networks. Further analytical results show that the model can explain the empirical results of Carrell et al. (2013). In particular, segregation in the classroom harms the transmission of peer effects that would benefit the lower achieving students. The presence of weak ties could counteract this outcome.
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