Peer effect analysis with latent processes

Abstract: I study peer effects that arise from irreversible decisions in the absence of a standard social equilibrium. I model a latent sequence of decisions in continuous time and obtain a closed-form expression for the likelihood, which allows to estimate proposed causal estimands. The method avoids regression on conditional expectations or linear-in-means regression -- and thus reflection-type problems (Manski, 1993) or simultaneity issues -- by modeling the (unobserved) realized direction of causality, whose probability is identified. Under a parsimonious parametric specification, I introduce a peer effect parameter meant to capture the causal influence of first-movers on their peers. Various forms of peer effect heterogeneity can be accommodated. Parameters are shown to be consistently estimated by maximum likelihood methods and lend themselves to standard inference.