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Testing the consistency of nested logit models with utility maximization

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  • Herriges, Joseph A.
  • Kling, Catherine L.

Abstract

The Nested Multinomial Logit (NMNL) model is used extensively in modeling consumer choices among discrete alternatives when the number of alternatives is large. Unfortunately, applied researchers often find that estimated NMNL models fail to meet the Daly-ZacharyMcFadden (DZM) sufficient conditions for consistency with stochastic utility maximization. Borsch-Supan (1990) provides a relaxed set of conditions to test for consistency. While these conditions are increasingly cited, they are seldom tested. This paper corrects and extends BorschSupan's Theorem 2, providing simple necessary conditions on first, second, and third derivatives of choice probabilities and a graph oft he bounds they place on dissimilarity parameters.
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Suggested Citation

  • Herriges, Joseph A. & Kling, Catherine L., 1996. "Testing the consistency of nested logit models with utility maximization," Economics Letters, Elsevier, vol. 50(1), pages 33-39, January.
  • Handle: RePEc:eee:ecolet:v:50:y:1996:i:1:p:33-39
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    References listed on IDEAS

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    1. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
    2. Hensher, David A, 1986. "Sequential and Full Information Maximum Likelihood Estimation of a Nested Logit Model," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 657-667, November.
    3. Borsch-Supan, Axel, 1990. "On the compatibility of nested logit models with utility maximization," Journal of Econometrics, Elsevier, vol. 43(3), pages 373-388, March.
    4. Train, Kenneth E & Ben-Akiva, Moshe & Atherton, Terry, 1989. "Consumption Patterns and Self-selecting Tariffs," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 62-73, February.
    5. Edward R. Morey & Robert D. Rowe & Michael Watson, 1993. "A Repeated Nested-Logit Model of Atlantic Salmon Fishing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(3), pages 578-592.
    6. Wayne Leonard, J., 1992. "A utility that believes in incentives," The Electricity Journal, Elsevier, vol. 5(10), pages 40-50, December.
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