Instrumental variables are often used to identify peer effects. This paper shows that instrumenting the ‘peer average outcome’ with ‘peer average characteristics’ requires the researcher to include the instrument at the individual level as an explanatory variable.We highlight the bias that occurs when failing to do this.

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Oxford Bulletin of Economics and Statistics
Department of Applied Economics

von Hinke Kessler Scholder, S.M.L, Leckie, G, & Nicoletti, C. (2019). The use of instrumental variables in peer effects models. Oxford Bulletin of Economics and Statistics, 81(5), 305–9049. doi:10.1111/obes.12299