[gov3009-l] Steenburgh on "Substitution Patterns of the Random Coefficients Logit"

Matt Blackwell mblackwell at iq.harvard.edu
Mon Mar 1 10:43:45 EST 2010


We hope you will join us this Wednesday, March 3rd at the Applied
Statistics workshop when we will be happy to have Thomas Steenburgh
(Harvard Business School). Details, an abstract, and a link to the
paper are below. A light lunch will be served. Thanks!

"Substitution Patterns of the Random Coefficients Logit"
Thomas Steenburgh
Harvard Business School
March 3rd, 2010, 12 noon
K354 CGIS Knafel (1737 Cambridge St)


Previous research suggests that the random coefficients logit is a
highly flexible model that overcomes the problems of the homogeneous
logit by allowing for differences in tastes across individuals. The
purpose of this paper is to show that this is not true. We prove that
the random coefficients logit imposes restrictions on individual
choice behavior that limit the types of substitution patterns that can
be found through empirical analysis, and we raise fundamental
questions about when the model can be used to recover individuals’
preferences from their observed choices.

Part of the misunderstanding about the random coefficients logit can
be attributed to the lack of cross-level inference in previous
research. To overcome this deficiency, we design several Monte Carlo
experiments to show what the model predicts at both the individual and
the population levels. These experiments show that the random
coefficients logit leads a researcher to very different conclusions
about individuals’ tastes depending on how alternatives are presented
in the choice set. In turn, these biased parameter estimates affect
counterfactual predictions. In one experiment, the market share
predictions for a given alternative in a given choice set range
between 17% and 83% depending on how the alternatives are displayed
both in the data used for estimation and in the counterfactual
scenario under consideration. This occurs even though the market
shares observed in the data are always about 50% regardless of the


Matthew Blackwell
PhD Candidate
Institute for Quantitative Social Science
Department of Government
Harvard University
email: mblackwell at iq.harvard.edu
url: http://people.fas.harvard.edu/~blackwel/

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