1. Intellectual Merit of the Proposed Activity This proposal consists of a set of interrelated research projects that explore the theoretical modeling and statistical identification of social interactions and the evaluation of policies in uncertain economic environments. The first part of the project will analyze models of social interactions. Social interactions models have been proposed to explain a range of socioeconomic outcomes and seem especially important in understanding persistent inequality across groups. The work proposed here will extend the existing literature in several directions. One main theme is the econometric identification of social interactions. While in many contexts, social factors seem important in understanding individual socioeconomic outcomes. The proposed research will develop new strategies for identifying social interactions with particular attention to how one can identify different types of social interactions when a researcher cannot measure all of the characteristics of an individual's group. This research will help place empirical claims about social interactions on a much firmer basis than is currently the case. Second, the proposed research will integrate models of the effects of social interactions with models of group formation and analyze the theoretical and econometric implications of this integration. In contexts such as residential neighborhoods, social interactions are a primary determinant of group compositions and so a complete theory of inequality must account for this. The second part of the proposal will develop tools to facilitate the evaluation of alternative government policies. One theme will explore policy design when the policymaker does not know the true model of the phenomena he wishes to influence. Model uncertainty may occur because of uncertainty over general questions of the theoretical determinants of some outcome of interest, uncertainty about the way to quantitatively specify a theory, or because of uncertainty about issues of measurement and heterogeneity across units of observations, to name what seem to be particularly salient factors in social science. The analysis will address model uncertainty issues using model averaging methods that have recently been developed in statistics and have begun to receive application in economics. Finally, the proposal describes research to study fundamental limits in the design of government policies. Government policies are typically chosen to affect both the mean and level of fluctuations of some outcome of interest. Within the control theory literature, there exist a number of results on frequency-specific tradeoffs that imply that any government policy that attempts to stabilize some outcome will inevitably reduce fluctuations at certain frequencies while exacerbating fluctuations at others. These tradeoffs do not appear to have been exploited in social science contexts. 2. Broader Impacts of the Proposed Activity The proposed research potentially has three broader impacts. First, it represents an effort to integrate sociological and economic perspectives on individual behavior and group outcomes. As such, it attempts to break down interdisciplinary barriers and may have general value in the social sciences. Second, the work may prove to be policy relevant. The analysis of model uncertainty will facilitate the development of econometric tools that are appropriate for the explicit evaluation of the effects of policies. Third, the analysis of design limits represents a new perspective on how government policies can stabilize dynamic socioeconomic outcomes at different frequencies, and how stabilization at different frequencies may be traded off. Finally, the authors plan to produce a graduate level monograph on social interactions that should facilitate the training of students.
