J.R. DeShazo () (Department of Policy Studies, UCLA) Trudy Ann Cameron () (Department of Economics, University of Oregon) Manrique Saenz (Central Bank of Costa Rica)
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We develop and evaluate a test of choice set misspecification for a multinomial logit choice model. This test determines whether the choice set designated by the researcher mistakenly assigns relevant substitutes to the numeraire good. We develop this test by generalizing the traditional McFadden-type conditional logit model to evaluate whether the traditional model is conditioned on an overly restrictive set of substitution possibilities. The test has a convenient feature: while it requires information on potentially relevant, but omitted, substitute goods, it does not require the researcher to observe consumers choices among these omitted potential substitutes if they select the numeraire good (which contains these omitted substitutes). A comparison of the traditional multinomial logit choice model and our more general model suggests that choice set misspecification may produce biased parameters that distort welfare estimates to a consequential extent.
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Find related papers by JEL classification: C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality Q26 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Recreational Aspects of Natural Resources
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