A model of peer effects in school (Q2070568)

This paper studies endogenous choices of peers and peer effect in schools. The agents in a network chooses links which determines the structure on the basis of empirical models including the linear-in-means system. The stable networks in terms of pairwise Nash stability are characterized for this model. It is shown that each stable network is a locally complete network. All individuals respond in the best way to others' strategies and links are mutually accepted. The model is solved through a sequential algorithm following Watts' work. It reveals that agents make distance based decisions regarding their friendship. Better students tend to choose to avoid interactions with lower ability students. An extension model is also considered in the paper, where other characteristics not correlated with outcome impact the link formation process. Some applications to experiments and empirical works have been conducted.