Working Paper: CEPR ID: DP13236
Authors: Bernard Salani; Frank Wolak
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 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: Industrial Organization; Discrete Choice Demand Systems
JEL Codes: C50; C51; C52; D10; D20; D40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Estimator based on random coefficients (C51) | Improves estimation efficiency (C51) |
| Model specification (C51) | Robustness of the estimator (C51) |
| Estimator provides excellent starting values (C51) | Overall estimation process (C13) |
| Method's design (C90) | Practical applicability (C01) |
| Random coefficients (C39) | Impact on demand systems (D12) |
| Estimator and BLP model (C51) | Consistent estimation of parameters (C51) |