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Estimating Price Elasticities with Non-Linear Errors in Variables

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  • Aprajit Mahajan

    () (Department of Economics, Stanford University)

Abstract

This paper estimates a price elasticity using a flexible demand specification on survey data where prices are observed with error are correlated with household characteristics. The demand function is modelled as being a polynomial (and more generally also including trigonometric terms) in the unobserved true prices and the form of the dependency between the observed (mismeasured) prices and household characteristics is modelled parametrically. I identify and estimate the model by adapting the approach of Hausman, Newey, Ichimura, and Powell (1991) and Schennach (2004). The exible specifications allow us to observe that price elasticities vary across the price distribution, something missed in previous work using linear demand specifications.

Suggested Citation

  • Aprajit Mahajan, 2009. "Estimating Price Elasticities with Non-Linear Errors in Variables," Discussion Papers 08-045, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:08-045
    as

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    References listed on IDEAS

    as
    1. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 7-30.
    2. Hausman, Jerry A. & Newey, Whitney K. & Ichimura, Hidehiko & Powell, James L., 1991. "Identification and estimation of polynomial errors-in-variables models," Journal of Econometrics, Elsevier, vol. 50(3), pages 273-295, December.
    3. Susanne M. Schennach, 2004. "Estimation of Nonlinear Models with Measurement Error," Econometrica, Econometric Society, vol. 72(1), pages 33-75, January.
    4. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, vol. 15(2), pages 211-245, February.
    5. Geert Ridder & Yingyao Hu, 2004. "Estimation of Nonlinear Models with Measurement Error Using Marginal Information," Econometric Society 2004 North American Summer Meetings 21, Econometric Society.
    6. Haerdle,Wolfgang & Stoker,Thomas, 1987. "Investigations smooth multiple regression by the method of average derivatives," Discussion Paper Serie A 107, University of Bonn, Germany.
    7. John Kennan, 1989. "Simultaneous Equations Bias in Disaggregated Econometric Models," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 151-156.
    8. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    price elasticities;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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