Improving the Numerical Performance of BLP Static and Dynamic Discrete Choice Random Coefficients Demand Estimation
AbstractThe widely-used estimator of Berry, Levinsohn and Pakes (1995) produces estimates of consumer preferences from a discrete-choice demand model with random coefficients, market-level demand shocks and endogenous prices. We derive numerical theory results characterizing the properties of the nested fixed point algorithm used to evaluate the objective function of BLP's estimator. We discuss problems with typical implementations, including cases that can lead to incorrect parameter estimates. As a solution, we recast estimation as a mathematical program with equilibrium constraints, which can be faster and which avoids the numerical issues associated with nested inner loops. The advantages are even more pronounced for forward-looking demand models where Bellman's equation must also be solved repeatedly. Several Monte Carlo and real-data experiments support our numerical concerns about the nested fixed point approach and the advantages of constrained optimization.
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Date of creation: May 2009
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Find related papers by JEL classification:
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- L0 - Industrial Organization - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-23 (All new papers)
- NEP-DCM-2009-05-23 (Discrete Choice Models)
- NEP-ECM-2009-05-23 (Econometrics)
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