Substitution Patterns of the Random Coefficients Logit
AbstractPrevious research suggests that the random coefficients logit is a highly flexible model that overcomes the problems of the homogeneous logit by allowing for differences in tastes across individuals. The purpose of this paper is to show that this is not true. We prove that the random coefficients logit imposes restrictions on individual choice behavior that limit the types of substitution patterns that can be found through empirical analysis, and we raise fundamental questions about when the model can be used to recover individuals' preferences from their observed choices. Part of the misunderstanding about the random coefficients logit can be attributed to the lack of cross-level inference in previous research. To overcome this deficiency, we design several Monte Carlo experiments to show what the model predicts at both the individual and the population levels. These experiments show that the random coefficients logit leads a researcher to very different conclusions about individuals' tastes depending on how alternatives are presented in the choice set. In turn, these biased parameter estimates affect counterfactual predictions. In one experiment, the market share predictions for a given alternative in a given choice set range between 17% and 83% depending on how the alternatives are displayed both in the data used for estimation and in the counterfactual scenario under consideration. This occurs even though the market shares observed in the data are always about 50% regardless of the display.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-053.
Length: 41 pages
Date of creation: Jan 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-DCM-2010-01-23 (Discrete Choice Models)
- NEP-ECM-2010-01-23 (Econometrics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Soebagio Notosoehardjo).
If references are entirely missing, you can add them using this form.