Title: Social Networks with Misclassified Links (joint w Arthur Lewbel and Xi Qu).

Abstract. We propose an adjusted 2SLS estimator for social network models when the links reported in samples are subject to two-sided misclassification errors (due, e.g., to recall errors by survey respondents, or lapses in data input). In a feasible structural form, misclassified links make all covariates endogenous and add a new source of correlation between the structural errors and endogenous peer outcomes (in addition to simultaneity), thus invalidating conventional estimators used in the literature. We resolve these issues by adjusting endogenous peer outcomes with estimates of the misclassification rates and constructing new instruments that exploit properties of the noisy network measures. We apply our method to study peer effects in household decisions to participate in a microfinance program in Indian villages. We find that ignoring the issue of link specification and applying conventional instruments would result in an upward bias in peer effect estimates.