Selection bias in estimation of peer effects in product adoption

Abstract

It is well recognized that consistent estimation of peer effects faces formidable identification challenges. The confounding factors the literature usually focuses on are endogenous group formation, correlated unobservables and simultaneity. In this paper, I show that another significant source of bias arises when a researcher examines peer effects in product adoption. When people differ in their valuations of a product, people with higher valuations tend to adopt earlier so that only those with increasingly lower valuations comprise the set of potential adopters as time progresses. Such an endogenous attrition over time, if not correctly accounted for, will lead to inconsistent estimates of peer effects. I present simulations to numerically demonstrate the presence and extent of such a selection bias. I also propose a simple solution to remove the bias and examine its performance.