The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
In response to a change, individuals may choose to follow the responses of their friends or, alternatively, to change their friends. To model these decisions, consider a game where players choose their behaviors and friendships. In equilibrium, players internalize the need for consensus in forming friendships and choose their optimal strategies on subsets of
k players—a form of bounded rationality. The
k‐player consensual dynamic delivers a probabilistic ranking of a game's equilibria, and via a varying
k, facilitates estimation of such games.
Applying the model to adolescents' smoking suggests that: (a) the response of the friendship network to changes in tobacco price amplifies the intended effect of price changes on smoking, (b) racial desegregation of high schools decreases the overall smoking prevalence, (c) peer effect complementarities are substantially stronger between smokers compared to between nonsmokers.
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