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

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  • Mathias REYNAERT
  • Frank VERBOVEN

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 Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces12.07.

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Date of creation: Jun 2012
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Handle: RePEc:ete:ceswps:ces12.07

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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.
  2. Heiss, Florian & Winschel, Viktor, 2008. "Likelihood approximation by numerical integration on sparse grids," Journal of Econometrics, Elsevier, vol. 144(1), pages 62-80, May.
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  7. Verboven, Frank, 1996. "International price discrimination in the European car market," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101467, Katholieke Universiteit Leuven.
  8. Michelle Sovinsky Goeree, 2005. "Advertising in the US Personal Computer Industry," Industrial Organization 0503002, EconWPA.
  9. Amemiya, Takeshi, 1977. "The Maximum Likelihood and the Nonlinear Three-Stage Least Squares Estimator in the General Nonlinear Simultaneous Equation Model," Econometrica, Econometric Society, vol. 45(4), pages 955-68, May.
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  11. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, September.
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