Institute for Fiscal Studies
Institutional Affiliation: Institute for Fiscal Studies
Information about this author at RePEc
NBER Working Papers and Publications
|August 2016||Exclusion Bias in the Estimation of Peer Effects|
with Marcel Fafchamps: w22565
We examine a largely unexplored source of downward bias in peer effect estimation, namely, exclusion bias. We derive formulas for the magnitude of the bias in tests of random peer assignment, and for the combined reflection and exclusion bias in peer effect estimation. We show how to consistently test random peer assignment and how to estimate and conduct consistent inference on peer effects without instruments. The method corrects for the presence of reflection and exclusion bias but imposes restrictions on correlated effects. It allows the joint estimation of endogenous and exogenous peer effects in situations where instruments are not available and cannot be constructed from the network matrix. We estimate endogenous and exogenous peer effects in two datasets where instrumental approach...