Correcting for endogeneity in behavioral choice models with social influence variables

Abstract

While psychologists and behavioral economists emphasize the importance of social influences, an outstanding issue is how to capture such influences in behavioral models used to inform urban planning and policy. In this paper we focus on operational models that do not require explicit knowledge of the individual networks of decision makers. We employ a field effect variable to capture social influences, which is calculated as the percent of population in the peer group that has chosen the specific alternative. We define the peer group based on socio-economic status and spatial proximity of residential location. As in behavioral economics and psychology, the concept is that one is influenced by the choices made by one’s peers. However, using such a social influence variable in a behavioral model causes complications because it is likely endogenous; unobserved factors that impact the peer group also influence the decision maker, yielding correlation between the field effect variable and the error. The contribution of this paper is the use of the Berry, Levinsohn, and Pakes (BLP) method to correct the endogeneity in a choice model. The two-stage BLP introduces constants for each peer group to remove the endogeneity from the choice model (where it is difficult to deal with) and insert it into a linear regression model (where endogeneity is relatively easier to deal with). We test the method using a mode choice data set from the Netherlands and readily available software and find there is an upward bias of the field effect parameter when endogeneity is not corrected. The procedure outlined presents a practical and tractable method for incorporating social influences in choice models.