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Application of the ML Hausman approach to the demand of water for residential use: heterogeneity vs two-error specification

This paper presents an application of two ML models to the analysis of residential demand of water - the heterogeneity and the two-error model, both apt to model demand in presence of a kinked budget constraint. The heterogeneity model is especially suitable when the distribution is characterized by a strong clustering around the kinks. Since in practice observations can be very close, but not exactly at the kink, its application may require the definition of an interval of data around the kink, so that the observations falling inside this interval are attributed to the kink. We propose a procedure, based upon the estimates obtained from the twoerror model, to define this interval. In this application we find that the heterogeneity model allows to obtain more efficient estimates than the two-error model for the parameter of principal interest, i.e. the coefficient of the price variable.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200604.

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Date of creation: 2006
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Handle: RePEc:cns:cnscwp:200604
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  1. Herriges, Joseph A & King, Kathleen Kuester, 1994. "Residential Demand for Electricity under Inverted Block Rates: Evidence from a Controlled Experiment," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 419-30, October.
  2. Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
  3. CĂ©line Nauges & Alban Thomas, 2000. "Privately Operated Water Utilities, Municipal Price Negotiation, and Estimation of Residential Water Demand: The Case of France," Land Economics, University of Wisconsin Press, vol. 76(1), pages 68-85.
  4. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
  5. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-30, December.
  6. Bar-Shira, Ziv & Finkelshtain, Israel & Simhon, Avi, 2005. "Regulating Irrigation Via Block-Rate Pricing: An Econometric Analysis," Discussion Papers 14982, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
  7. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
  8. Ellen M. Pint, 1999. "Household Responses to Increased Water Rates during the California Drought," Land Economics, University of Wisconsin Press, vol. 75(2), pages 246-266.
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