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Test of Choice Set Misspecification for Discrete Models of Consumer Choice

Author

Listed:
  • J.R. DeShazo

    (Department of Policy Studies, UCLA)

  • Trudy Ann Cameron

    (Department of Economics, University of Oregon)

  • Manrique Saenz

    (Central Bank of Costa Rica)

Abstract

We develop and evaluate a test of choice set misspecification for a multinomial logit choice model. This test determines whether the choice set designated by the researcher mistakenly assigns relevant substitutes to the numeraire good. We develop this test by generalizing the traditional McFadden-type conditional logit model to evaluate whether the traditional model is conditioned on an overly restrictive set of substitution possibilities. The test has a convenient feature: while it requires information on potentially relevant, but omitted, substitute goods, it does not require the researcher to observe consumers choices among these omitted potential substitutes if they select the numeraire good (which contains these omitted substitutes). A comparison of the traditional multinomial logit choice model and our more general model suggests that choice set misspecification may produce biased parameters that distort welfare estimates to a consequential extent.

Suggested Citation

  • J.R. DeShazo & Trudy Ann Cameron & Manrique Saenz, 2001. "Test of Choice Set Misspecification for Discrete Models of Consumer Choice," University of Oregon Economics Department Working Papers 2003-7, University of Oregon Economics Department, revised 05 Nov 2001.
    • Handle: RePEc:ore:uoecwp:2003-7
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    File URL: http://economics.uoregon.edu/papers/UO-2003-7_DeShazo_Cameron_Saenz_Misspecification.pdf
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    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • Q26 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Recreational Aspects of Natural Resources

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