Fast, 'Robust', and Approximately Correct: Estimating Mixed Demand Systems

83 Pages Posted: 15 Oct 2018 Last revised: 31 Oct 2018

See all articles by Bernard Salanie

Bernard Salanie

Columbia University - Graduate School of Arts and Sciences - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Frank Wolak

National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

Many econometric models used in applied work integrate over unobserved heterogeneity. We show that a class of these models that includes many random coefficients demand systems can be approximated by a "small-sigma" expansion that yields a straightforward 2SLS estimator. We study in detail the models of market shares popular in empirical IO ("macro BLP"). Our estimator is only approximately correct, but it performs very well in practice. It is extremely fast and easy to implement, and it accommodates to misspecifications in the higher moments of the distribution of the random coefficients. At the very least, it provides excellent starting values for more commonly used estimators of these models.

Keywords: demand systems, discrete choice, industrial organization

JEL Classification: C50, C51, C52, D10, D20, D40

Suggested Citation

Salanie, Bernard and Wolak, Frank A., Fast, 'Robust', and Approximately Correct: Estimating Mixed Demand Systems (October 2018). CEPR Discussion Paper No. DP13236. Available at SSRN: https://ssrn.com/abstract=3266429

Bernard Salanie (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Frank A. Wolak

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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