Social Interactions and Endogenous Association - Department of ...

that group size facilitates segregation and show that there is a stronger relationship
between own characteristics and associates’ characteristics in large macro-groups.
While estimating the effect of endogenous sorting on behaviors is complicated,
we provide evidence that endogenous association affects behavior. As indicated, our
model implies that the availability of some like-minded individuals permits people to
associate with people with the same behavioral tendencies, accentuating their own
behavioral tendencies. Consistent with this implication, we show the mean behavior
among the associates of people who are inclined to a particular behavior (based on their
exogenous characteristics) are higher (relative to people whose characteristics imply that
they are unlikely to have high levels of the behavior) in groups where there some people
inclined to the same behavior. We also show that the availability of people who are
inclined to a particular behavior increases the behaviors of people who are prone to that
behavior relative to people whose characteristics imply that they are unlikely to have
high levels of the behavior. Lastly, we provide some two-stage least squares estimates of
the effect of associates’ behaviors on own behavior.
II. A Model
II.A. The Framework
This section develops a model of social interactions with endogenous association.
People are characterized by observable characteristics, x, and an shock, ε . They choose
an action, y, and a set of associations. An individual with characteristic x and shock ε
who takes action y has a utility of,
U
1 2
= β ′ xy + εy
− y −
144244
2 3
Private Utility
cT {
Cost of
Association
⎛ A ψ A 2
A A′
A ⎞ α
+ ⎜θy
y − y + ω′
xy + x Φx
+ γ ′ x y⎟T
⎝144444444
2
244444444
⎠ 3
Social Utility
This utility function has three components: a private utility; a cost of interacting; and a
social utility. Variables with overbars and A-superscripts denote means among a person’s
associates (
A 2
y denotes the mean of the squared values of associates’ actions). To
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