Causal Interpretation of Linear Social Interaction Models with Endogenous Networks

Abstract: This study investigates the causal interpretation of linear social interaction models in the presence of endogeneity in network formation under a heterogeneous treatment effects framework. We consider an experimental setting in which individuals are randomly assigned to treatments while no interventions are made for the network structure. We show that running a linear regression ignoring network endogeneity is not problematic for estimating the average direct treatment effect. However, it leads to sample selection bias and negative-weights problem for the estimation of the average spillover effect. To overcome these problems, we propose using potential peer treatment as an instrumental variable (IV), which is automatically a valid IV for actual spillover exposure. Using this IV, we examine two IV-based estimands and demonstrate that they have a local average treatment-effect-type causal interpretation for the spillover effect.