nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2006‒02‒12
seventeen papers chosen by
Philip Yu
Hong Kong University

  1. Switch on the competition; causes, consequences and policy implications of consumer switching costs. By Marc Pomp; Victoria Shestalova; L. Rangel
  2. Ideology and existence of 50%-majority equilibria in multidimensional spatial voting models By Crès, Hervé; Ünver, Utku
  3. The Impact of Internet on the Market for Daily Newspapers in Italy By Lapo Filistrucchi
  4. A latent factor model for ordinal data to measure multivariate predictive ability of financial market movements By Philippe HUBER; Olivier SCAILLET; Maria-Pia VICTORIA-FESER
  5. Identifying State Dependence in Non-Stationary Processes By Timothy Halliday
  6. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Strøm, Steinar; Haabeth, Tonje
  7. Do the rich vote Conservative because they are rich? By Lind, Jo Thori
  8. A Combined Approach for Segment-Specific Analysis of Market Basket Data By Yasemin Boztug; Thomas Reutterer
  9. Validity of Discrete-Choice Experiments - Evidence for Health Risk Reduction By Harry Telser; Peter Zweifel
  10. Income and Happiness: New Results from Generalized Threshold and Sequential Models By Stefan Boes; Rainer Winkelmann
  11. Age and Choice in Health Insurance: Evidence from Switzerland By Karolin Becker; Peter Zweifel
  12. Validity and Reliability of Willingness-to-Pay Estimates: Evidence from Two Overlapping Discrete-Choice Experiments By Harry Telser; Karolin Becker; Peter Zweifel
  13. Secondary School Track Selection of Single-Parent Children – Evidence from the German Socio-Economic Panel By Philippe Mahler; Rainer Winkelmann
  14. Spatial Effects of Willingness-to-Pay: The Case of Nuclear Risks By Peter Zweifel; Yves Schneider; Christian Wyss
  15. Consumer Resistance Against Regulation: The Case of Health Care By Peter Zweifel; Harry Telser; Stephan Vaterlaus
  16. Ordered Response Models By Stefan Boes; Rainer Winkelmann
  17. Cost Sharing in Health Insurance: An Instrument for Risk Selection? By Karolin Becker; Peter Zweifel

  1. By: Marc Pomp; Victoria Shestalova; L. Rangel
    Abstract: The success or failure of reforms aimed at liberalising markets depends to an important degree on consumer behaviour. If consumers do not base their choices on differences in prices and quality, competition between firms may be weak and the benefits of liberalisation to consumers may be small. One possible reason why consumers may respond only weakly to differences in price and quality is high costs of switching to another firm. This report presents a framework for analysing markets with switching costs and applies the framework in two empirical case studies. The first case study analyses the residential energy market, the second focuses on the market for social health insurance. In both markets, there are indications that switching costs are substantial. The report discusses policy options for reducing switching costs and for alleviating the consequences of switching costs.
    Keywords: Switching costs; consumer behaviour; competition; energy markets; health insurance
    JEL: L13 D12
    Date: 2005–09
  2. By: Crès, Hervé; Ünver, Utku
    Abstract: When aggregating individual preferences through the majority rule in an n-dimensional spatial voting model, the "worst-case" scenario is a social choice configuration where no political equilibrium exists unless a super majority rate as high as 1-1/n is adopted. In this paper the authors assume that a lower d-dimensional (d<n)linear map spans the possible candidates plateforms. These d "ideological" dimensions imply some linkages between the n political issues. The authors randomize over these linkages and show that there almost surely exists a50%-majority equilibria in the above worst-case scenario, when n grows to infinity.Moreover the equilibrium is the mean voter. The speed of convergence (toward 50%)of the super majority rate guaranteeing existence of equilibrium is computed for d= 1 and 2.
    Keywords: spatial voting; super majority; ideology; mean voter theorem; random point set
    JEL: C62 D72
    Date: 2006–02–06
  3. By: Lapo Filistrucchi
    Abstract: Recent years have seen a surge in websites that provide news for free and, up to the end of 2001, daily newspapers in Italy have shown a growing trend towards making available online for free; the exact articles published on paper. To assess whether on-line news and traditional daily newspapers are substitute, complement or independent goods, I model the choice between different daily newspapers as a discrete choice among differentiated products. Considering the availability of a website as a newspaper characteristic and controlling for other observable and unobservable characteristics of newspapers and of the outside good, I estimate a logit model of demand on market level data from 1976 to 2001 for the main national daily newspapers in Italy. Results suggest that opening a website had a negative impact both on the sales of the newspaper who opened it and on those of its rivals. I calculate the implied short-run and approximated long-run losses in both sales and profits and provide some evidence of the additional negative effect stemming from the general availability of Internet and on-line news. Results also contribute to explaining why, starting from the end of 2001, many publishers introduced a fee to read on-line the paper edition of the newspaper.
    Keywords: daily newspapers, Internet, websites, substitution, discrete choice models, product differentiation, dynamics, market level data
    JEL: C2 D12 L12 O3
    Date: 2005
  4. By: Philippe HUBER (University of Geneva, HEC and FAME); Olivier SCAILLET (University of Geneva, HEC and FAME); Maria-Pia VICTORIA-FESER (University of Geneva, HEC and FAME)
    Abstract: In this paper we develop a structural equation model with latent variables in an ordinal setting which allows us to test broker-dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. An empirical illustration is given for mid-term forecasts simultaneously made by two broker-dealers for several countries.
    Keywords: structural equation model, latent variable, generalised linear model, factor analysis, multinomial logit, forecasts, LAMLE, canonical correlation
    JEL: C12 C13 C30 C51 C52 C53 G10
    Date: 2005–10
  5. By: Timothy Halliday (Department of Economics, University of Hawaii at Manoa; John A. Burns School of Medicine, University of Hawaii at Manoa)
    Abstract: We consider the identification of state dependence in a non-stationary process of binary outcomes within the context of the dynamic logit model with time-variant transition probabilities and an arbitrary distribution for the unobserved heterogeneity. We derive a simple identification result that allows us to calculate a test for state dependence in this model. We also consider alternative tests for state dependence that will have desirable properties only in stationary processes and derive their asymptotic properties when the true underlying process is non-stationary. Finally, we provide Monte Carlo evidence that shows a range of non-stationarity in which the effects of mis-specifying the binary process as stationary are not too large.
    Keywords: Dynamic Panel Data Models, State Dependence, Non-Stationary Processes
    Date: 2006
  6. By: Dalen, Dag Morten (Norwegian School of Management and the Frisch Centre); Strøm, Steinar (Dept. of Economics, University of Oslo); Haabeth, Tonje (University of Oslo and the Frisch Centre)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2005–11–25
  7. By: Lind, Jo Thori (Dept. of Economics, University of Oslo)
    Abstract: Political economy models predict that the rich oppose redistribution, and hence vote for conservative parties. Although this seems to fit the data well, I show that this is not true when we control for unobservable characteristics. Using Norwegian survey data, I study to what extent voting is caused by income. Unobserved characteristics correlated with income are handled by using fixed effects panel data discrete choice models. Although a positive association between income and conservative voting persists when controlling for unobservables, the magnitude of the effect is reduced by a factor of five. To correct for measurement error, I instrument income with average income by profession. The magnitude of the coefficients is increased, but the main conclusions remain.
    Keywords: Political economy; redistribution; voting; multinomial logit; panel data
    JEL: C23 C25 D31 D72 H11 H53
    Date: 2006–02–03
  8. By: Yasemin Boztug; Thomas Reutterer
    Abstract: There are two main research traditions for analyzing market basket data that exist more or less independently from each other, namely exploratory and explanatory model types. Exploratory approaches are restricted to the task of discovering cross-category interrelationships and provide marketing managers with only very limited recommendations regarding decision making. The latter type of models mainly focus on estimating the effects of category-level marketing mix variables on purchase incidences assuming cross-category dependencies. We propose a procedure that combines these two modeling approaches in a novel two-stage procedure for analyzing cross-category effects based on shopping basket data: In a data compression step we first derive a set of market basket prototypes and generate segments of households with internally more distinctive (complementary) cross-category interdependencies. Utilizing the information on categories that are most responsible for prototype construction, segment-specific multivariate logistic models are estimated in a second step. Based on the data-driven way of basket construction, we can show significant differences in cross- effects and related price elasticities both across segments and compared to the global (segment-unspecific) model.
    Keywords: Marketing, Choice Models, Market Basket Analysis, Cross-Category Effects, Segmentation
    JEL: C31 C33 C35 C63 M31
    Date: 2006–01
  9. By: Harry Telser (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: There is growing interest in discrete-choice experiments (DCE) as a method to elicit consumers' preferences in the health care sector. Increasingly this method is used to determine willingness-to-pay (WTP) for health-related goods. However, its external validity in the health care domain has not been investigated until today. This paper examines the external validity of DCE concerning the reduction of a health risk. Convergent validity is examined by comparing the value of a statistical life with other preference elicitation techniques, such as revealed preference. Criterion validity is shown by comparing WTP values derived from stated choices in the experiment with those derived from actual choices made by the same individuals. Both tests provide strong evidence in favor of external validity of the DCE method.
    Keywords: Choice Experiments (DCE), Willingness-to-Pay (WTP), Validity, Risk Reduction, Hip Protectors
    JEL: C25 C52 D12 I18 I19
    Date: 2003–10
  10. By: Stefan Boes (Socioeconomic Institute, University of Zurich); Rainer Winkelmann (Socioeconomic Institute, University of Zurich)
    Abstract: Empirical studies on the relationship between income and happiness commonly use standard ordered response models, the most well-known representatives being the ordered logit and the ordered probit. However, these models restrict the marginal probability effects by design, and therefore limit the analysis of distributional aspects of a change in income, that is, the study of whether the income effect depend on a person’s happiness. In this paper we pinpoint the shortcomings of standard models and propose two alternatives, namely generalized threshold and sequential models. With data of two waves of the German Socio-Economic Panel, 1984 and 1997, we show that the more general models yield different marginal probability effects than standard models.
    Keywords: Ordered response models, marginal effects, subjective well-being
    JEL: C25 I31
    Date: 2004–06
  11. By: Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Elements of regulation inherent in most social health insurance systems are a uniform package of benefits and uniform cost sharing. Both elements risk to burden the population with a welfare loss if preferences differ. This suggests introducing more contracted choice; however, it is widely believed that this would not benefit the aged. This study examines the relationship between age and willingness-to-pay (WTP) for additional options in Swiss social health insurance. Through discrete choice experiments, a marked diversity of preferences can be established. The .ndings suggest that the aged require less rather than more compensation for all cutbacks considered, pointing to potential for contracts that induce self-rationing, in return for lower premiums.
    Keywords: willingness-to-pay, health insurance, age, rationing
    JEL: C35 C93 D61 I11 I18
    Date: 2004–08
  12. By: Harry Telser (Socioeconomic Institute, University of Zurich); Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Discrete-choice experiments, while becoming increasingly popular, have rarely been tested for validity and reliability. This contribution purports to provide some evidence of a rather unique type. Two surveys designed to measure willingness-to-accept (WTA) for reform op-tions in Swiss health care and health insurance are used to provide independent information with regard to two elements of reform. The issue to be addressed is whether WTA values converge although the three overlapping attributes (a more restrictive drug benefit, a delayed access to medical innovation, and a change in the monthly insurance premium) are embedded in widely differing choice sets. Experiment A contains rather radical health system reform options, while experiment B concentrates on more familiar elements such as copayment and the benefit catalogue. While mean WTA values differ between experiments, they tend to vary in similar ways, suggesting at least theoretical validity and reliability.
    Keywords: willingness-to-pay, discrete choice experiments, validity, reliability, framing effects
    JEL: C35 C93 I11
    Date: 2004–09
  13. By: Philippe Mahler (Socioeconomic Institute, University of Zurich); Rainer Winkelmann (Socioeconomic Institute, University of Zurich)
    Abstract: In present day Germany, one in seven children is raised in a single parent household. We investigate the effect of single parenthood on children’s educational attainment, measured by the school track at the age 14, using ordered probit models. We study whether the effect of living in single parenthood during early or late childhood differs. Finally, we ask whether the family effect operates through resources – fewer income and parental time available for the child –, or through adverse effects on psychological well-being. The data used in this study are a nationally representative sample of 14 year old children drawn from the German Socio-Economic Panel.
    Keywords: school choice, educational attainment, ordered response model
    JEL: I21 J12
    Date: 2004–09
  14. By: Peter Zweifel (Socioeconomic Institute, University of Zurich); Yves Schneider (Socioeconomic Institute, University of Zurich); Christian Wyss
    Abstract: This paper examines the spatial dimension of external effects stemming from nuclear power plants. Using data from a stated choice experiment conducted in Switzerland, marginal willingness to pay (MWP) for risk reduction and willingness to pay (WTP) for solving the nuclear waste problem are estimated. Interestingly, MWP for risk reduction increases with distance from the power plant, while WTP for solving the waste problem decreases in the vicinity of the plant and is zero thereafter. These findings suggest that distance is endogenous with respect to coverage because consumers self-insure through their residential choice, but exogenous (and of lesser relevance) with respect to the waste disposal problem.
    Keywords: nuclear energy, spatial effects of externalities, stated choice experiment
    JEL: R19 R22 D89 Q40
    Date: 2005–01
  15. By: Peter Zweifel (Socioeconomic Institute, University of Zurich); Harry Telser (Socioeconomic Institute, University of Zurich); Stephan Vaterlaus (Plaut Economics, Regensdorf)
    Abstract: Regulation fostering Managed Care alternatives in health insurance is spreading. This work reports on an experiment designed to measure the amounts of compensation asked by the Swiss population (in terms of reduced premiums) for Managed-Care type restrictions in the provision of health care. It finds that restrictions on the freedom of physician choice would require an average compensation of more than one-third of the premium, while generic substitution even meets with a small willingness to pay. Marked preference heterogeneity is an argument against regulation imposing uniformity of contract in Swiss social health insurance.
    Keywords: health insurance, health care, regulation, preference measurement, discrete choice experiments
    JEL: L51 D61 C93 I11 I18
    Date: 2005–02
  16. By: Stefan Boes (Socioeconomic Institute, University of Zurich); Rainer Winkelmann (Socioeconomic Institute, University of Zurich)
    Abstract: We discuss regression models for ordered responses, such as ratings of bonds, schooling attainment, or measures of subjective well-being. Commonly used models in this context are the ordered logit and ordered probit regression models. They are based on an underlying latent model with single index function and constant thresholds. We argue that these approaches are overly restrictive and preclude a flexible estimation of the effect of regressors on the discrete outcome probabilities. For example, the signs of the marginal probability effects can only change once when moving from the smallest category to the largest one. We then discuss several alternative models that overcome these limitations. An application illustrates the benefit of these alternatives.
    Keywords: Marginal effects, generalized threshold, sequential model, random coeffcients, latent class analysis, happiness
    JEL: C25
    Date: 2005–03
  17. By: Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Health insurance is potentially subject to risk selection, i.e. adverse selection on the part of consumers and cream skimming on the part of insurers. Adverse selection models predict that competitive health insurers can eschew high-risk individuals by o¤ering contracts with low deductibles or co-payment rates, while attracting low-risk individuals with higher copayments, resulting in a separating equilibrium. This contribution seeks to determine whether in competitive Swiss social health insurance policies with deductibles in excess of the legal minimum do indeed serve as an instrument of risk selection. In a discrete choice experiment, e¤ected in 2003, some 1,000 individuals were given the hypothetical choice of alternative insurance contracts that differed both in terms of deductibles and copayments and in bene.ts covered. Results suggest that healthy individuals, i.e. those not having consulted medical services during the past six months, were more likely to select a policy with a high deductible. Compensation demanded for voluntarily accepting an increase in the annual deductible also varies with socioeconomic characteristics and increases with the current level of deductible, as predicted by theory and constituting evidence in favor of the risk selection hypothesis. The experiment allows to compute necessary premium reductions and provides guidance for the pricing policy of insurers when o¤ering di¤erentiated products.
    Keywords: health insurance, deductible, copayment, willingness-to-pay, ad- verse selection
    JEL: C35 C93 D61 I11 I18
    Date: 2005–11

This nep-dcm issue is ©2006 by Philip Yu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.