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Abstract

We develop an empirical discrete-choice interaction model with a finite number of agents. We characterize its equilibrium properties—in particular the correspondence between interaction strength, number of agents, and the set of equilibria—and propose to estimate the model by means of simulation methods. In an empirical application, we analyze the individual behavior of high school teenagers in almost 500 school classes from 70 schools. In our baseline model endogenous social interaction effects are strong for behavior closely related to school (truancy), somewhat weaker for behavior partly related to school (smoking, cell phone ownership, and moped ownership) and absent for behavior far away from school (asking parents' permission for purchases). Intra-gender interactions are generally much stronger than cross-gender interactions. In a model with school-specific fixed effects social interaction effects are insignificant, with the exception of intra-gender interactions for truancy. Copyright © 2007 John Wiley & Sons, Ltd.