Social interactions in small groups

Abstract

Most models of endogenous social interactions implicitly assume that individuals are interacting directly or indirectly with a very large (innite) group of others. These models generally feature multiple equilibria when the marginal impact of peers exceeds some strictly positive critical value. This paper shows that this result depends critically on the assumption that the size of the peer group is large, and analyzes the properties of an alternative model in which the peer groups are small (nite). I nd that when peer groups are small, multiple equilibria exist for any positive degree of peer influence. A brief application to the variation in youth smoking rates by ethnicity demonstrates the potential interaction of group size and strength of peer eect in generating a wide range of equilibrium behavior.

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