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Binary Choice under Social Interactions: An Empirical Study with and without Subjective Data on Expectations

Ji Li and Lung-Fei Lee
Journal of Applied Econometrics
Vol. 24, No. 2 (Mar., 2009), pp. 257-281
Published by: Wiley
Stable URL: http://www.jstor.org/stable/40206273
Page Count: 25
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Binary Choice under Social Interactions: An Empirical Study with and without Subjective Data on Expectations
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Abstract

This paper examines two methods of modeling binary choice with social interactions: models assuming homogeneous rational expectations and models using subjective data on expectations. Exploiting a unique survey conducted during the 1996 US presidential election that was designed to study voting behavior under social context, we find that in various model specifications using subjective expectations consistently improves models' goodness-of-fit; and that subjective expectations are not rational as formulated by Brock and Durlauf. Specifically, members' characteristics are individually important in forming expectations. We also include correlated effect in the rational expectation model. This extension provides a remedy to the selection issues that often arise in social interaction models.

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