Abstract
In many consumption settings (e.g., restaurants), individuals consume products either alone or with their peers (e.g., friends). In this study, we propose a general framework for modeling peer effects by including two new peer effects: the exogenous peer effect (exogenous factors that could change the peer’s behavior) and the peer presence effect (when the peer is present but not consuming). We also include the well known endogenous peer effect. We develop an empirical model that allows us to identify all three effects simultaneously and apply the model to behavioral data from a casino setting. It is a simultaneous equation model with the structural parameters expressed as a function of the ratio of the reduced form parameters. This necessitates the use of the Minimum Expected Loss approach, allowing us to obtain consistent estimates at the individual level. Our data comprise detailed gambling activity for a panel of individuals at a single casino over a two-year period. Our results show that all three types of peer effects exist. These effects vary across individuals and exhibit considerable asymmetry within pairs of peers. We discuss how our results can help managers allocate resources more effectively and policy makers formulate regulatory guidelines with more complete information.
Published Version
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