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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 coefficient 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 efficiency 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 efficiency when combined with optimal instruments.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9026.

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Date of creation: Jun 2012
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Handle: RePEc:cpr:ceprdp:9026

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Keywords: optimal instruments; random coefficients demand model;

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References

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  1. Crawford, Gregory S., 2012. "Endogenous Product Choice : A Progress Report," The Warwick Economics Research Paper Series (TWERPS) 979, University of Warwick, Department of Economics.
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  17. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2013. "A Structural Approach to Identifying the Sources of Local Currency Price Stability," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 175-210.
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Cited by:
  1. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas, 2010. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," ZEW Discussion Papers 10-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Emla Fitzsimons & Marcos Vera-Hernández, 2014. "Food for Thought? Breastfeeding and Child Development," DoQSS Working Papers 14-04, Department of Quantitative Social Science - Institute of Education, University of London.
  3. Lapo Filistrucchi & Tobias J. Klein, 2013. "Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects," Working Papers 13-20, NET Institute.
  4. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," IDEI Working Papers 823, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," TSE Working Papers 14-471, Toulouse School of Economics (TSE).

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