Homo Socialis

Steven N. Durlauf Department of Economics, University of Wisconsin

Moscow 2014

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Not only is the pathology of the ghetto self-perpetuating, but one kind of

pathology breeds another. The child born into the ghetto is more likely to

come into a world of broken homes and illegitimacy; and this family and

social stability is conducive to delinquency, drug addiction, and criminal

violence. Neither instability nor crime can be controlled by police

vigilance or by reliance on the alleged deterring forces of legal

punishment, for the individual crimes are to be understood more as

symptoms of the contagious sickness of the community itself rather than

as the result of inherent criminal or deliberate viciousness.

Kenneth B. Clark, Dark Ghetto (1965)

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…changes have taken place in ghetto neighborhoods, and the groups

that have been left behind are collectively different than those that lived

in these neighborhoods in earlier years. It is true that long-term welfare

families and street criminals are distinct groups, but they live and interact

in the same depressed community and they are part of the population

that has, with the exodus of the more stable working- and middle-class

segments, become increasingly isolated socially from mainstream

patterns and norms of behavior

William Julius Wilson, The Truly Disadvantaged (1987)

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Homo Economicus and Homo Socialis A growing body of theoretical, econometric, and empirical research has

established the importance of social influences on socioeconomic

outcomes.

This work represents a broader conception of human behavior, but is

consistent with the logic of economic theory.

This approach is especially important, in my judgment, understanding

persistent poverty and inequality in affluent societies.

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Outline

1. Basic ideas

2. Theory

3. Econometrics

4. Public Policy

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Basic Ideas

1. Individual beliefs, preferences, and opportunities are conditioned by

social structure. This dependence typically takes the form of

complementarities, so the likelihood or level of an action by one person

increases with respect to the behavior (or certain characteristics) of

others.

Such models provide the basis for a theory of group-level inequality.

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Ethnic Inequality in America

Asian American

European American Hispanic

African American

US Census Bureau 2004 Median Household Income (2004) 57,518 48,977 34,241 30,134

National Center for Health Statistics, 2006 Infant Mortality (2002-2004) 4.8 5.7 5.6 13.7

CPS Time Series Tables, U.S. Census Bureau

High School Completion (2004) 86.80% 90% 58.40% 80.60%

College Completion (2004) 49.40% 28.20% 12.10% 17.60%

CDC Quickstats Teen (15-19) Pregnancy Rate per 1000 (2009) n/a 42.8 100.5 114.5

BLS statistics Unemployment Rate (Dec 2013) 4.1 5.7 8.3 11.6

Prison Policy Initiative Incarceration Rate per 100000 (2010) n/a 380 966 2207

National Vital Statistics Report

Life Expectancy (at birth, both genders) n/a 78.8 81.2 74.7

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2. Social structures evolve in response to these interactions. Groups

(nonoverlapping subsets of the population) stratify along characteristics

which affect outcomes. Economic and social (typically ethnic)

segregation result in neighborhoods, schools, firms.

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Racial Segregation in Chicago

Source: Dustin A. Cable, University of Virginia, Weldon Cooper Center for Public Service

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Racial Segregation in Illinois

Source: Dustin A. Cable, University of Virginia, Weldon Cooper Center for Public Service

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Racial Segregation in Madison

Darker red indicates a higher concentration of African Americans.

Source: Data from U.S. Census Bureau 2010, Prepared by City of Madison Planning Division 2012

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Racial Segregation in Southeastern Wisconsin:

Source:

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3. Persistent intergenerational inequality and poverty result as individuals

face different interactions environments over their lives as well as well as

persistent intergenerational inequality and poverty as stratification of

society affects both parents and children.

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This map shows the average percentile rank of children who grow up in below-median income families across areas of the U.S. (absolute upward mobility). Lighter colors represent areas where children from low-income families are more likely to move up in the income distribution. From Chetty, Hendren, Kiline, Saez http://www.equality-of-opportunity.org/ , 2013.

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Markov Transition Matrices by Income Quintile for Parents and Children

Source: Mazumder, B. (2011). "Black-White Differences in Intergenerational Economic Mobility in the US" Center for

Economic Studies working paper.

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Social interaction models thus study the interplay of social forces which

influence individual outcomes and individual decisions which determine

group memberships and hence social forces

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Key Features of this Approach

1. Individual incentives and social structure meld into a more general

explanation of individual behavior. From the perspective of economics,

introduction of better sociology; from the perspective of sociology, better

economics!

2. Approach explicitly incorporates incomplete markets and other

deviations from baseline neoclassical theory of choice.

3. Aggregate behaviors such as crime or nonmarital fertility rates emerge

through the interactions within a heterogeneous population

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Examples of Social Interactions 1. Peer group effects

2. Role models

3. Social norms

4. Social learning

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Phenomena Where Social Interactions Plausibly Matter

1. Fertility

2. Education

3. Employment

4. Health

5. Language

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Types of Groups

1. Endogenous

-residential eighborhoods

-schools

-firms

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2. “Exogenous”

- ethnicity

- gender

-religion

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Basic Structure of Social Interactions Theories

“Standard” Model of Individual Choice

iω = choice of behavior of individual i

iΩ = constraint set

iX = observable individual characteristics,

iε = unobservable individual characteristics (to the modeler)

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Algebraically, the individual choices represent solutions to

( )( )

max , ,

such that ,i i i i i

i i i

V X

Xω

ω ε

ε∈Ω

Ω = Ω

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Social Interactions Approach

( )S i = social structure associated with individual i

( )S iY = characteristics of ( )S i

( )e

i iµ ω

−= subjective beliefs individual i has concerning behavior of

others, where

( )( ) 1 1 1, , ,

S i i i Iω ω ω ω ω

− − +=

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In this case, choice is described by

( ) ( ) ( ) ( )( )( )( ) ( )( )

max , , , , ,

such that , , ,i i

e

i i i iS i S i s i

e

i i i i iS i

V X S i Y Y

X Y

ωω µ ω ε

µ ω ε

∈Ω −

−Ω = Ω

In words, preferences, constraints, beliefs depend on social structure.

Choice-based logic of economic theory is preserved.

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Key Theoretical Properties

1. Multiple Equilibria

2. Social Multipliers

3. Phase Transition

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– The properties are “universal,” although they of course depend on

parameters.

– These models are typically nonlinear.

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Empirical Evidence

1. Ethnography

2. Social Psychology Experiments

3. “Natural” Experiments

4. Statistical Analyses of Observational Data

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Ethnography

1. Important modern researchers include Elijah Anderson, Mitchell

Dunier, Annette Lareau

2. Evidence is powerful, and has received, in my view, inadequate

attention by economists because of its qualitative nature.

3. Important feature: heterogeneity of individual behaviors. Requires

explicit modeling of poor communities as interactive, stochastic

processes.

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Social Psychology Experiments

1. Robbers Cave (Sherif)

2. “Obedience to Authority” (Milgram)

Evidence of social effects is extremely persuasive. Further, these

experiments clearly deal with the statistical problems described above.

However, link to poverty-related behaviors and to residential

neighborhoods is far from clear.

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Analyses Based on “Natural” Experiments

1. Gautreaux

2. Moving to Opportunity

3. US Army

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However, each has limitations. Gautreaux and Army suffer from self-

selection of “treatment”. MTO has random assignment of vouchers,

but use of vouchers induces self-selection. This limits what can be

learned, notably generalizability. Further, all three are “black boxes.”

Example: Asthma and MTO

However, this does not justify treating analyses as uninformative, it

simply means that one needs to recognize their limitations.

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Regression Analysis with Observational Data

Most empirical work examines

( )i i iS ik cX dYω ε= + + +

A statistically significant d is interpreted as evidence of social effects.

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Where Does the Regression Literature Stand?

1. Various combinations of group variables do appear to be statistically

significant in a wide range of studies. Datcher (1982) originate

literature.

2. Not clear which variables best capture group effects. Little attention

to robustness.

3. Role of endogenous effects typically ignored.

4. Social structure usually assumed, not estimated.

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General Econometric Criticisms

1. Clasical Identification Question: Assuming one has “properly”

accounted for the error structure in choice model, can different types

of social interaction effects be disentangled?

2. Self-Selection: How does self-selection into neighborhoods affect

standard econometric procedures and how can self-selection be

accounted for.

3. Unobserved Group-Level Variables: Omitted common factors may

confound social interactions.

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Example

To understand the difficulties that exist in empirically identifying a causal

role for groups in determining individual outcomes, it is useful to consider

a specific example. Suppose that a researcher wishes to evaluate the

effect of high poverty neighborhoods on teenage educational attainment,

such as completion of high school. The crude fact leading one to believe

such an effect is present is a bivariate relationship between high poverty

neighborhoods and low educational attainment.

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Possible Explanations

1. High poverty neighborhoods are disproportionately composed of

adults with low labor market aspirations (as compared to more

affluent communities). If parents transmit low aspirations to their

own children, and if these low aspirations adversely influence

educational attainment, then poor neighborhoods will exhibit lower

educational attainment than richer ones, without any causal influence

from the neighborhood to the individual.

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2. Families in high poverty neighborhoods are less likely to be able to

finance post-secondary education, hence the opportunities for further

education generated by a high school diploma are not available to

many teenagers in these neighborhoods.

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3. Teacher quality is lower in high poverty neighborhoods as better

teachers should to be employed in schools in communities with lower

crime rates.

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4. High poverty neighborhoods possess a relatively high concentration

of individuals who, despite graduating from high school, failed to

achieve success in the labor market. Hence teenagers observing

the economic benefits of graduation will not observe examples where

graduation had much of a payoff.

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5. Teenagers are influenced by the aspirations of role models in the

community where they live. If the role models in a neighborhood

have low labor market aspirations, then this will depress the

educational achievements of children in the neighborhood.

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6. Teenagers in high poverty neighborhoods are, due to local public

finance, higher crime, etc. provided lower quality schools than

students in other communities.

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7. Teenagers are influenced by the behaviors of their peers through a

“primitive” desire to conform to others. In a given community, high

and low levels of educational attainment are self-reinforcing as the

educational effort of a given teenager reflects his preference to seem

like “one of the crowd.”

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Each of these explanations will produce the same correlations between

low individual educational attainment and neighborhood poverty, but

each is based on a different causal mechanism.

The statistical question is whether these different explanations can be

disentangled in a given data set.

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explanations 1 and 2 attribute the correlation of neighborhood poverty

and low individual educational attainment to self-selection

explanation 3 is an example of an unobserved group level effect

explanations 4 and 5 are examples of contextual effects as the

distribution of educational levels and incomes among older members of

the community are affecting current behaviors;

explanation 6 is an example of an endogenous effect as it is based on

contemporaneous interdependences in behavior.

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My Perspective

1. Individual pieces of evidence may be challenged, but overall, clear

that groups effects matter.

2. Statistical analyses are the least persuasive component of evidence.

The literature suffers from serious questions re: identification and

misspecification. Too much attention to statistical significance, too

little attention to identification.

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Public Policy -Associational redistribution

-Nonlinearity

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Associational Redistribution

Examples

-affirmative action

-busing for integration

-charter schools/magnet schools

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Normative Issues -competing ethical claims

-political feasibility

-supply side approach

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Ethics of Associational Redistribution Following ideas due to John Roemer and others, one objective of public

policy is to reduce the dependence of individual outcomes on factors for

which an individual is not responsible.

Many group memberships fall into this category, therefore the

government may be justified in “redistributing” group memberships.

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Competing Ethical Claims

-Meritocracy

-Self Actualization

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Politics of Associational Redistribution

Bottom Line: Such policies are immensely unpopular. Possible alternative: implement policies that only indirectly redistribute

memberships. One way to do this is to invest differentially in individuals

to alter chances of admission, etc.

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Nonlinearities

Social interactions models make clear that policy responses may be

highly nonlinear.

This means is that one cannot evaluate a large policy intervention by a

proportional scaling up of the effects found from a small policy

intervention. Nonlinearity makes it hard to evaluate policy on a priori

grounds.

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It is possible that a large scale expansion of the MTO demonstration

could be far less efficacious than the small scale program has been.

On the other hand, it is possible for large scale interventions to be far

more efficacious than small scale ones. One reason is that a large scale

intervention may alter the number of possible equilibrium aggregate

behaviors in each school.

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Nonlinearity produces new issues associated with optimal policy design.

Should resources be concentrated on a few of the disadvantaged in

order to exploit nonlinearities? How does one deal with fairness issues?

Bottom line: equity and efficiency tradeoffs

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Conclusions

1. Theories with social interactions well developed

2. Econometrics and empirical work making progress

3. Policy implications yet to be developed.

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