Working Paper: NBER ID: w25726
Authors: Bernard Salani; Frank A. 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 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.
Keywords: Econometrics; Demand Systems; Estimation
JEL Codes: L00; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prices (P22) | market shares (L17) |
| unobserved heterogeneity (C21) | consumer choice (D10) |
| estimation method (C51) | accuracy of results (C52) |
| linear two-stage least squares estimator (C51) | parameters of mixed demand system (C51) |
| estimation method (C51) | starting values for more complex estimators (C51) |