Peer Effects in Consumption in India: An Instrumental Variables Approach Using Negative Idiosyncratic Shocks

Abstract

This paper examines peer e¤ects in consumption in context of a less developed country. Specifically, the question that I seek to answer is whether consumption expenditure of a household is in ‡uenced by that of its peers in a less developed country. To examine this question, I use newly available household level data from India. I de…ne a household's peer group as other households living in its village/neighborhood. In assessing the in ‡uences of peers in this context, there are two key empirical challenges including shared group-level unobservables, and simultaneity of peer in ‡uences. I address these issues by using an instrumental variables/…xed e¤ects approach that compares households in the same district but di¤erent villages/neighborhoods who are thus exposed to di¤erent sets of peers. In particular, I use plausibly exogenous variation in idiosyncratic expenditure shocks-which are accidental and negative in nature-faced by peers as instruments for peers'consumption expenditure. Preferred speci…cation suggests that a one standard deviation increase in average consumption expenditure of a household's peers causes the household's own consumption expenditure to increase by 0.42 standard deviations. Falsi…cation tests and robustness checks support the validity of my results. My …ndings suggest that policies that in ‡uence a household's consumption will also a¤ect the consumption of the household's peers through social interactions. This implies traditional analyses of consumption intervention programs that do not take into account such spillover e¤ects will understate the total social impact of the programs, and hence lead to inaccurate evaluation of cost-e¤ectiveness of such programs.

Malnutrition in the shadow of economic growth

“… 2 2 See also Chakrabarti (2008), Mukherjee, Rajaraman, and Swaminathan (2010), and Roychowdhury (2019). …”

Peer effects in consumption: a spatial demand system estimation using data from Brazil

“…Over the last few years, with more data and strategies to overcome identification issues, a sizable body of studies on peer influences in consumption has emerged (Kuhn et al, 2011;Moretti, 2011;De Giorgi et al, 2020). However, there are still few applications to underdeveloped countries (Roychowdhury, 2019) and disaggregated consumption (Boneva, 2014;Verhelst and Van den Poel, 2014).…”

“…Studies have explored exogenous wealth shocks of neighbors in consumption literature to find peer effects on consumption expenditure. Roychowdhury (2019) uses negative income shocks of peer's as an instrument for peer consumption to identify peer effect. Kuhn et al (2011) uses lottery data to exploits unexpected income gains from peers.…”

“…Studying the peer or neighbor's effect on consumption is considered crucial in the context of underdeveloped countries (Roychowdhury, 2019) and is relevant for at least two reasons (De Giorgi et al, 2016). The first concerns the distortions in social welfare observed in intratemporal and intertemporal household consumption decision context.…”

“…The most popular strategy adopted by recent literature to separate the effects mentioned above involves an instrumental instrument approach using income shocks of families (Roychowdhury, 2019) or exogenous income variations such as those generated by some transfer programs (Boneva, 2014;Angelucci et al, 2017). Due to data limitations, this thesis strategy does not separate all three effects.…”