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Improving the performance of random coefficients demand models: The role of optimal instruments

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  • REYNAERT, Mathias
  • VERBOVEN, Frank

Abstract

We shed new light on the performance of Berry, Levinsohn and Pakes? (1995) GMM estimator of the aggregate random coe¢ cient logit model. Based on an extensive Monte Carlo study, we show that the use of Chamberlain?s (1987) optimal instruments overcomes most of the problems that have recently been documented with standard, non-optimal instruments. Optimal instruments reduce small sample bias, but prove even more powerful in increasing the estimator?s e¢ ciency and stability. Other recent methodological advances (MPEC, polynomial-based integration of the market shares) greatly improve computational speed, but they are only successful in terms of bias and e¢ ciency when combined with optimal instruments.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2012011.

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Length: 31 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:ant:wpaper:2012011

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Cited by:
  1. Lapo Filistrucchi & Tobias J. Klein, 2013. "Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects," Working Papers 13-20, NET Institute.
  2. Kaiser, Ulrich & Méndez, Susan & Rønde, Thomas & Ullrich, Hannes, 2013. "Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79937, Verein für Socialpolitik / German Economic Association.

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