Peer Effects in Consideration and Preferences

Abstract

We develop a general model of discrete choice that incorporates peer effects in preferences and consideration sets. We characterize the equilibrium behavior and establish conditions under which all parts of the model can be recovered from a sequence of choices. We allow peers to affect preferences, consideration, or both. We show that these peer-effect mechanisms have different behavioral implications in the data. This allows us to recover the set and the type of connections between the agents in the network. We then use this information to recover each agent's preferences and consideration mechanisms. These nonparametric identification results allow for general forms of heterogeneity across agents and do not rely on the variation of either exogenous covariates or the set of available options (menus). We apply our results to model expansion decisions by tea chains and find evidence of limited consideration. We simulate counterfactual predictions and show how limited consideration slows market penetration and competition.