Peer Effects in the Diffusion of Innovations: Theory and Simulation

This paper presents a theoretical framework for studying peer effects in the diffusion of innovations. The underlying mechanisms of peer effects are generally under-discussed in existing studies. By investigating diffusion processes in the real world and reviewing previous studies, we find that information transmission, experience sharing and externalities are the basic mechanisms through which peer effects occur. They are termed as information effect, experience effect and externality effect, respectively. The three effects could occur through different types of relationships in a social network. Each of them plays a different role at different stages of a diffusion process. A simulation model incorporating multiple effects in a multiplex network is developed to provide a theoretical study. We simulate the experience effect and the externality effect in a context of rural diffusion. It generates the widely acknowledged patterns of diffusion in various scenarios. The experiments conducted using the model show that peer effects as a whole can be substantially misestimated if the underlying mechanisms are ignored.