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Estimating demand with recentered instruments

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  • Kirill Borusyak
  • Peter Hull
  • Mauricio Caceres Bravo

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 & Peter Hull & Mauricio Caceres Bravo, 2025. "Estimating demand with recentered instruments," CeMMAP working papers 10/25, Institute for Fiscal Studies.
    • Handle: RePEc:azt:cemmap:10/25
    DOI: 10.47004/wp.cem.2025.1025
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