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Estimating Demand with Recentered Instruments

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  • Kirill Borusyak
  • Mauricio Caceres Bravo
  • Peter Hull

Abstract

We develop a new approach to estimating flexible demand models with exogenous supply-side shocks. Our approach avoids conventional assumptions of exogenous product characteristics, putting no restrictions on product entry, despite using instrumental variables that incorporate characteristic variation. The proposed instruments are model-predicted responses of endogenous variables to the exogenous shocks, recentered to avoid bias from endogenous characteristics. We illustrate the approach in a series of Monte Carlo simulations.

Suggested Citation

  • Kirill Borusyak & Mauricio Caceres Bravo & Peter Hull, 2025. "Estimating Demand with Recentered Instruments," Papers 2504.04056, arXiv.org.
    • Handle: RePEc:arx:papers:2504.04056
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