A Demand System With Social Interactions : Evidence from Cex

A Quadratic Almost Ideal Demand System that allows for social interactions is described and then estimated on CEX data. Social interactions are introduced as mean budget shares and depend on peer membership and visibility. Peer identification is obtained by means of a similarity index which measures the probability of group membership. Reflection problem is tackled directly and therefore estimation is carried on with a Generalized Spatial 2SLS that deal with two types of endogeneity: the first due to contemporaneous choices of households, the second due to contemporaneous choice of goods. The results support the hypothesis that total expenditure allocation to budget shares depends both on social interaction and visibility