NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Fast, "Robust", and Approximately Correct: Estimating Mixed Demand Systems

Bernard Salanié, Frank A. Wolak

NBER Working Paper No. 25726
Issued in April 2019
NBER Program(s):Environment and Energy Economics, Industrial Organization

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.

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Document Object Identifier (DOI): 10.3386/w25726

 
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