Dynamic Linear Economies with Social Interactions

Abstract

Social interactions arguably provide a rationale for several important socio-economic phenomena, from smoking and other risky behavior in teens to peer effects in school performance. We study social interactions in dynamic economies. For these economies, we provide existence (Markov Perfect Equilibrium in pure strategies), ergodicity, and welfare results. We characterize several equilibrium properties of policy functions, spatial correlations, and social multiplier effects. Most importantly, we study formally the issue of the identification of social interactions, emphasizing the restrictions imposed by dynamic equilibrium conditions with respect to economies populated by myopic agents and economies in which spatial correlation is induced by selection. In this respect we find that identification can be obtained but only in non-stationary economies. Journal of Economic Literature Classification Numbers: C18, C33, C62, C63, C73.

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Cite this paper

@inproceedings{zgr2011DynamicLE, title={Dynamic Linear Economies with Social Interactions}, author={Onur {\"{O}zg{\"{u}r and Alberto Bisin and Larry Blume and Michele Boldrin and Yann Bramoull{\'e} and Pierre-Andre Chiappori}, year={2011} }