Peer Influences on Adolescent Alcohol Consumption : Evidence Using an Instrumental Variables/Fixed Effect Approach

There is a large literature that attempts to estimate the importance of peer effects for adolescent decision making, including alcohol consumption. There are several empirical difficulties in addressing this research question, including the endogeneity of peers, ‘third factors’ that affect the decisions of all peers simultaneously, and the difficulty of the identification of policy relevant parameters due to simultaneity of decisions by peers. In order to address these empirical difficulties, I use an instrumental variables/fixed effects methodology that compares students in different grades within the same school who face a different set of classmates and classmates’ decisions. Within this context, I suggest that availability of alcohol in classmates’ homes and classmates’ parents’ alcohol abuse can then be used as instruments, tackling the simultaneity problem in empirical models of peer effects. The results indicate that a 10% increase in the proportion of classmates who drink increases the likelihood an individual drinks by 5 percentage points. This paper also provides evidence of peer effects in problem drinking, such as binge drinking, drunkenness, and being drunk at school