Endogenous Shocks in Social Networks: Exam Failures and Friends' Future Performance

Exam retakes, just as other types of shocks, or the treatment of one of the members in a specific network, influence not only the future performance of students, but also affect all their network connections. Therefore, it is crucial to understand the behaviour of the whole network in response to the retake. The probability of the retakes is dependent on the characteristics of the peer group and, as a result, highly endogenous. The logic used in the peer effect literature is adopted to develop the dynamic model and accounts for the endogeneity of the shock. The model allows us to predict the endogenous part of the friends' retake and use the unexpected component to estimate the effect of pure shock on the changes in a student's average grade. The identification conditions for the effect are derived and the consistent estimation procedure is proposed. The model has been applied to the dynamic network data on the students at HSE, Nizhniy Novgorod. The results suggest that, on average, the retake of the friend may have a negative effect on future performance. However, this effect has a different magnitude for students with and without their own retake, as well as for students from different departments.