Particular forms of externalities in which the actions of a reference group influence an individual’s preferences, constraints, or expectations. Also called ‘non-market interactions’ to emphasize the fact that they are not regulated by the price mechanism. More generally, the effect can arise from a direct communication of preferences, constraints, or expectations among individuals. The identity of the reference group depends on the context and can be an individual’s family, neighbours, peers, or even the entire population. Social interactions can explain large differences in outcomes between economies that have similar fundamentals. For example, the fact that Italy has much more tax evasion than the UK might he explained by a social custom of honest tax payment being present in the UK but absent in Italy. See also endogenous preferences; networks.
Reference: Oxford Press Dictonary of Economics, 5th edt.