POLICY INTERVENTIONS , LOW-LEVEL EQUILIBRIA AND SOCIAL INTERACTIONS

Interest in social interactions, neighborhood effects, and social dynamics in the last several years has seen a revival. Unfortunately, little progress has been made on empirical estimation of such interactions and testing for their presence, on the development of policy interventions which work through social interactions, or on the evaluation of such interventions because several basic identification and estimation problems have not been seriously confronted. Nevertheless, most of these problems are in principle solvable and methods for identifying social interactions and estimating their magnitudes are available and are outlined in this paper. These methods address simultaneity, correlated unobservables, errors-in-variables, and endogenous group membership problems. Moreover, while policy interventions with presumed effects on social interactions have not been well-designed thus far, at least to measure social interactions per se, this problem is not inherent and several policy interventions are suggested which could work primarily through social interactions and whose evaluation could establish their magnitudes. Interest in social interactions, neighborhood effects, and social dynamics in the last several years has seen a revival. One reason is the widespread perception that many social indicators in the U.S. have worsened. The increase in wage and income inequality is one of the most prominent of these trends; a decline in the earnings and incomes of those at the bottom of the distribution is another, separate trend concerning absolute rather than relative changes; and an increase in the concentration of poverty and racial segregation is another. While there is a often a tendency to assume that everything is getting worse when this is not correct--a view usefully countered by Jencks (1992)--it is unquestionable that some measures of social well-being have deteriorated. That inequality, concentration of poverty, segregation--and their continued persistence over time--might be a partial result of social interactions--that is, direct non-market interactions between individuals--that lead to low-level equilibria, or “traps,” is an old idea that saw its last major discussion in the 1960s and early 1970s. That period saw extensive discussions of the notion of a culture of poverty from which the poor cannot escape (Lewis, 1966), of externalities in housing markets which lead to prisoner's dilemmas and Pareto-inferior housing equilibria (Davis and Whinston, 1961), of segregation as a natural sorting and self-reinforcing mechanism (Schelling, 1971), and of peer group effects in schools (Coleman, 1966). The recent revival of interest in such models has come from a variety of sources. In sociology, the work of Wilson (1987) almost single-handedly brought the concept of neighborhood effects and role models back into general discussion, a discussion which has spilled over into all the social science disciplines. In economics, the work of Romer (1986), Lucas (1988), and others on the externalities in 1 See also Pollak (1976) for a well-known study of interdependent preferences, which is another form of social interaction. 2 technology and human capital investment that promote economic growth has spilled over into more microeconomic concerns with neighborhoods, income inequality, and the like (Benabou, 1993,1996; Brock and Durlauf, 1995, forthcoming; Durlauf, 1996a,1996b to cite the most influential works among many). The growth of game theory in economics has also led to branch dealing with the development of social norms and conventions as a natural outcome of group interactions (Young, 1996). The new theoretical literature on these issues in economics has spawned a number of papers which demonstrate that, under specified conditions and model assumptions, certain policy interventions can be shown to possibly counter the effects of undesirable social interactions and can have social-welfare-improving consequences (e.g., Benabou, 1996). In many cases, these interventions have been shown to permit an escape from the low-level equilibria resulting from those social interactions. A natural question is whether there is any empirical evidence that these, or other policy interventions that might be considered, would have the effects hypothesized, and for the reasons hypothesized, if they were in fact implemented. The answer to this question, in turn, naturally leads to an investigation of whether there have been any policy interventions in the past which have had, either intentionally or unintentionally, effects which have operated directly or indirectly on social interactions, and have been shown to have positive effects of one kind or another. This is the motivating issue for this paper. Answering these questions necessarily requires addressing the prior issue of whether the existence of social interactions can be detected with empirical analysis in the first place, which is