Discrete Choice with Endogenous Peer Selection

Abstract

We develop a continuous time discrete choice model of peer effects. The distinctive feature of the model is that agents might not consider all peers at the moment of making a decision. Instead, they select some of them on the basis of a mechanism that depends on recent choices. We characterize the equilibrium behavior and study the empirical content of the limited attention peer effect model. We allow changes in the choices of peers to affect both the set of peers to which the agent pays attention and her preferences over the alternatives. We exploit variation in choices together with variation in the size of the set of potential peers (or reference groups) to recover the preferences of the agents and the peer selection mechanisms. We apply our results to model expansion and contraction decisions by fast-food restaurants and find evidence of limited attention to actions of competitors.