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

83 Pages Posted: 8 Apr 2019

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: April 2019

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-σ” expansion that yields a linear two-stage least squares estimator. We study in detail the models of product market shares and prices popular in empirical IO. Our estimator is only approximately correct, but it performs very well in practice. It is extremely fast and easy to implement, and it is “robust” to changes 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.

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Suggested Citation

Salanie, Bernard and Wolak, Frank A., Fast, "Robust", and Approximately Correct: Estimating Mixed Demand Systems (April 2019). NBER Working Paper No. w25726. Available at SSRN: https://ssrn.com/abstract=3368016

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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