People don’t base decisions about their economic life solely on their own individually formed ideas and preferences. Rather, they’re influenced by the experiences of their peers and by social group norms. Gordon Dahl reviews the various ways family and neighborhood peer groups influence decisions to participate in the workforce and in government social assistance programs.
These social spillover effects are hard to estimate because of the problems that economists refer to as reflection, correlated unobservables, and endogenous group membership. Dahl explains how researchers have overcome these challenges to produce credible estimates of the effects of family and peer groups on work and program participation. He reviews the most rigorous evidence to date and discusses possible mechanisms.
Understanding neighborhood and family group influences is critical to thinking about policy, Dahl writes. The spillover effects on children, siblings, and neighbors can be just as important as the direct impact on parents and directly targeted peers, due to social multiplier effects.