Dynamic Linear Economies with Social Interactions

Abstract

from smoking and other risky behavior in teens to peer effects in school performance. We study social interactions in dynamic economies. For these economies, we provide existence (Markov Perfect Equilibrium in pure strategies), ergodicity, and welfare results. We characterize several equilibrium properties of policy functions, spatial correlations, and social multiplier effects. Most importantly, we study formally the issue of the identification of social interactions, emphasizing the restrictions imposed by dynamic equilibrium conditions with respect to economies populated by myopic agents and economies in which spatial correlation is induced by selection.