Working Paper: NBER ID: w19011
Authors: Kyoo Il Kim; Amil Petrin
Abstract: We develop simple tests for endogenous prices arising from omitted demand factors in discrete choice models. Our approach only requires one to locate testing proxies that have some correlation with the omitted factors when prices are endogenous. We use the difference between prices and their predicted values given observed demand and supply factors. If prices are exogenous, these proxies should not explain demand given prices and other explanatory variables. We reject exogeneity if these proxies enter significantly in utility as additional explanatory variables. The tests are easy to implement as we show with several Monte Carlos and discuss for three recent demand applications.
Keywords: price endogeneity; differentiated products; discrete choice models
JEL Codes: C3; L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price (D41) | unobserved portion of consumer utility (D11) |
| omitted product attributes (Y60) | price (D41) |
| unobserved portion of consumer utility (D11) | price elasticity estimates (D12) |
| proxies for unobserved attributes (C59) | demand (R22) |
| proxies significantly explain demand (D12) | presence of endogeneity (C20) |
| price endogeneity (E30) | omitted attributes (Y60) |