Nonparametric Discrete Choice Models With Unobserved Heterogeneity
57 Pages Posted: 3 Sep 2007
Date Written: August 2007
In this research, we provide a new method to estimate discrete choice models with unobserved heterogeneity that can be used with either cross-sectional or panel data. The method imposes nonparametric assumptions on the systematic subutility functions and on the distributions of the unobservable random vectors and the heterogeneity parameter. The estimators are computationally feasible and strongly consistent. We provide an empirical application of the estimator to a model of store format choice. The key insights from the empirical application are: 1) consumer response to cost and distance contains interactions and non-linear effects which implies that a model without these effects tends to bias the estimated elasticities and heterogeneity distribution and 2) the increase in likelihood for adding non-linearities is similar to the increase in likelihood for adding heterogeneity, and this increase persists as heterogeneity is included in the model.
Keywords: nonparametric, discrete choice, heterogeneity, random effects, store choice, panel data
JEL Classification: C14, C23, C33, C35
Suggested Citation: Suggested Citation