The Use of Instrumental Variables in Peer Effects Models
| Author | George Leckie,Cheti Nicoletti,Stephanie Hinke |
| Date | 01 October 2019 |
| Published date | 01 October 2019 |
| DOI | http://doi.org/10.1111/obes.12299 |
1179
©2019 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
Thisis an open access article under the ter ms of the CreativeCommons Attribution License, which permits use, distribution and reproduction in any medium, provided
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 81, 5 (2019) 0305–9049
doi: 10.1111/obes.12299
The Use of Instrumental Variables in Peer Effects
Models*
Stephanie von Hinke,†,‡,§ George Leckie¶ and
Cheti Nicoletti††,‡‡
†Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK
‡Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, The Netherlands
§Institute for Fiscal Studies, London, UK (e-mail: s.vonhinke@bristol.ac.uk)
¶Centre for Multilevel Modelling, University of Bristol, Bristol, UK (e-mail: g.leckie
@bristol.ac.uk)
††Department of Economics and Related Studies, University of York, Heslington, York YO10
5DD, UK
‡‡ISER, University of Essex, Colchester, UK (e-mail: cheti.nicoletti@york.ac.uk)
Abstract
Instrumental variables are often used to identify peer effects. This paper shows that in-
strumenting the ‘peer average outcome’ with ‘peer average characteristics’ requires the
researcher to include the instrument at the individual level as an explanatory variable. We
highlight the bias that occurs when failing to do this.
I. Introduction
Many papers in economics provide empirical evidence on the causal effect of peers on
individual outcomes using an instrumental variable (IV) approach. They usually consider
linear in mean regressions of an individual outcome on the corresponding average outcome
of peers and a set of individual explanatory variables.They may then instrument the average
outcome of peers with the peer average of certain characteristics.1
JEL Classification numbers: C31, C36, D01, I12, I20.
*The authors thank the editor, three anonymous referees, Mich`ele Belot, Peter Burridge, Fernanda Leite Lopez de
Leon, Anita Ratcliffe, Kim Scharf, Stefania Sitzia and FrankWindmeijer for helpful suggestions. We are extremely
grateful to all the families who took part in this study, the midwives for their help in recruiting them, and the
whole ALSPAC team, which includes interviewers, computer and laboratory technicians, clerical workers,research
scientists, volunteers, managers, receptionists and nurses.The UK Medical Research Council and the WellcomeTrust
(Grant ref: 092731) and the University of Bristol provided core support for ALSPAC. We gratefully acknowledge
financial support from the UK Medical Research Council (G1002345) and the UK Economic and Social Research
Council (RES-576-25-0032).
1Different types of instruments have been used, including, (i) the average price of peers’ decisions which is
exogenously shifted by the introduction of policy or programmeaffecting only some of the people (see the ‘partial-
population’ identification approach defined by Moffitt (2001), and the application in Dahl, Loken and Mogstad
(2014)); (ii) peer averages of predetermined variables that affect peers but only influence the individual outcome
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