Identification of a Rank-dependent Peer Effect Model (2410.14317v2)

Abstract: We develop a model that captures peer effect heterogeneity by modeling the endogenous spillover to be linear in ordered peer outcomes. Unlike the canonical linear-in-means model, our approach accounts for the distribution of peer outcomes as well as the size of peer groups. Under a minimal condition, our model admits a unique equilibrium and is therefore tractable and identified. Simulations show our estimator has good finite sample performance. Finally, we apply our model to educational data from Norway, finding that higher-performing friends disproportionately drive GPA spillovers. Our framework provides new insights into the structure of peer effects beyond aggregate measures.