NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Identifying Demand with Multidimensional Unobservables: A Random Functions Approach

Jeremy T. Fox, Amit Gandhi

NBER Working Paper No. 17557
Issued in November 2011
NBER Program(s):   IO   TWP

We explore the identification of nonseparable models without relying on the property that the model can be inverted in the econometric unobservables. In particular, we allow for infinite dimensional unobservables. In the context of a demand system, this allows each product to have multiple unobservables. We identify the distribution of demand both unconditional and conditional on market observables, which allows us to identify several quantities of economic interest such as the (conditional and unconditional) distributions of elasticities and the distribution of price effects following a merger. Our approach is based on a significant generalization of the linear in random coefficients model that only restricts the random functions to be analytic in the endogenous variables, which is satisfied by several standard demand models used in practice. We assume an (unknown) countable support for the the distribution of the infinite dimensional unobservables.

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Document Object Identifier (DOI): 10.3386/w17557

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