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Performance of Nested Logit Models when Welfare Estimation Is the Goal (The)

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

In this paper we examine the performance of nested logit models in the face of two specification errors. The first specification error arises when a nested logit model is appropriate, but the wrong nesting structure is chosen. The second specification error occurs when the underlying stochastic process is not consistent with nested logit. Particular attention is placed upon the impact that these errors can have on welfare predictions. Monte Carlo experiments are used, together with analytical results, to examine the resulting bias to welfare estimates. In addition, we explore the value of alternative model selection criteria in choosing nesting structures. Key words: nested logit, welfare analysis.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1480.

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Date of creation: 01 Aug 1997
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Publication status: Published in American Journal of Agricultural Economics, August 1997, vol. 79 no. 3, pp. 792-802
Handle: RePEc:isu:genres:1480
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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