nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2006‒03‒11
eight papers chosen by
Philip Yu
Hong Kong University

  1. Supermarket Pricing Strategies By Ellickson, Paul; Misra, Sanjog
  2. Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply By Rolf Aaberge; Ugo Colombino; Tom Wennemo
  3. Early Retirement Behaviour in the Netherlands: Evidence from a Policy Reform By Rob Euwals; Daniel van Vuuren; Ronald Wolthoff
  4. Heterogeneity and Microeconometrics Modelling By Martin Browning; Jesus Carro
  5. Intergenerational Educational Mobility in the Comprehensive Danish Welfare State: Testing the Primacy of Non-monetary Social Origin Effects By Mads Meier Jæger; Anders Holm
  6. Probit Models with Binary Endogenous Regressors By Jacob Nielsen Arendt; Anders Holm
  7. Is There Hedge Fund Contagion? By Nicole M. Boyson; Christof W. Stahel; Rene M. Stulz
  8. Estimation with the Nested Logit Model: Specifications and Software Particularities By Nadja Silberhorn; Yasemin Boztug; Lutz Hildebrandt

  1. By: Ellickson, Paul; Misra, Sanjog
    Abstract: Most supermarket firms choose to position themselves by offering either "Every Day Low Prices" (EDLP) across several items or offering temporary price reductions (promotions) on a limited range of items. While this choice has been addressed from a theoretical perspective in both the marketing and economic literature, relatively little is known about how these decisions are made in practice, especially within a competitive environment. This paper exploits a unique store level dataset consisting of every supermarket operating in the United States in 1998. For each of these stores, we observe the pricing strategy the firm has chosen to follow, as reported by the firm itself. Using a system of simultaneous discrete choice models, we estimate each store's choice of pricing strategy, conditional on its expectation over the choices of its rivals. We find evidence that firms cluster by strategy, choosing actions that agree with those of its rivals. We also find a significant impact of various demographic and firm characteristics, providing some qualified support for several specific predictions from marketing theory.
    Keywords: EDLP, promotional pricing, positioning strategies, supermarkets, discrete games
    JEL: M31 L11 L81
    Date: 2006
  2. By: Rolf Aaberge (Statistics Norway, Oslo and IZA Bonn); Ugo Colombino (University of Turin); Tom Wennemo (Statistics Norway, Oslo)
    Abstract: During the last two decades, the discrete-choice modelling of labour supply decisions has become increasingly popular, starting with Aaberge et al. (1995) and van Soest (1995). Within the literature adopting this approach there are however two potentially important issues that are worthwhile analyzing in their implications and that so far have not been given the attention they might deserve. A first issue concerns the procedure by which the discrete alternatives are selected to enter the choice set. For example van Soest (1995) chooses (non-probabilistically) a set of fixed points identical for every individual. This is by far the most widely adopted method. By contrast, Aaberge et al. (1995) adopt a sampling procedure suggested by McFadden (1978) and also assume that the choice set may differ across the households. A second issue concerns the availability of the alternatives. Most authors assume all the values of hours-of-work within some range [0, H] are equally available. At the other extreme, some authors assume only two or three alternatives (e.g. non-participation, part-time and full-time) are available for everyone. Aaberge et al. (1995) assume instead that not all the hour opportunities are equally available to everyone; they specify a probability density function of opportunities for each individual and the discrete choice set used in the estimation is built by sampling from that individual-specific density function. In this paper we explore by simulation the implications of the procedure used to build the choice set (fixed alternatives vs. sampled alternatives) and of accounting or not accounting for a different availability of alternatives. The way the choice set is represented seems to have little impact on the fitting of observed values, but a more significant and important impact on the out-ofsample prediction performance.
    Keywords: labour supply, discrete-choice models, quantity constraints, prediction performance
    JEL: C51 C52 H31 J22
    Date: 2006–02
  3. By: Rob Euwals (CPB Netherlands Bureau for Economic Policy Analysis, CEPR and IZA Bonn); Daniel van Vuuren (CPB Netherlands Bureau for Economic Policy Analysis and Free University of Amsterdam); Ronald Wolthoff (Free University of Amsterdam and Tinbergen Institute)
    Abstract: In the early 1990s, the Dutch social partners agreed upon transforming the generous and actuarially unfair PAYG early retirement schemes into less generous and actuarially fair capital funded schemes. The starting dates of the transitional arrangements varied by industry sector. In this study, we exploit the variation in starting dates to estimate the causal impact of the policy reform on early retirement behaviour. We use a large administrative dataset, the Dutch Income Panel 1989-2000, to estimate hazard rate models for early retirement. We conclude that the policy reform induced workers to postpone early retirement. In particular, both the price effect (reducing implicit taxes) and the wealth effect (reducing early retirement wealth) are shown to have a positive impact on the early retirement age. Yet, we show that model specifications including the most commonly used financial incentive measures are open to further improvements, given that these are outperformed by a simple specification with dummy variables.
    Keywords: early retirement, intertemporal choice, duration analysis
    JEL: C41 D91 J26
    Date: 2006–03
  4. By: Martin Browning (Department of Economics, University of Copenhagen); Jesus Carro (Department of Economics, Carlos III, Madrid)
    Abstract: Presented at the 2005 Econometric Society World Congress Plenary Session on "Modelling Heterogeneity". We survey the treatment of heterogeneity in applied microeconometrics analyses. There are three themes. First, there is usually much more heterogeneity than empirical researchers allow for. Second, the inappropriate treatment of heterogeneity can lead to serious error when estimating outcomes of interest. Finally, once we move away from the traditional linear model with a single 'fixed effect', it is very difficult to account for heterogeneity and fit the data and maintain coherence with theory structures. The latter task is one for economists: "heterogeneity is too important to be left to the statisticians". The paper concludes with a report of our own research on dynamic discrete choice models that allow for maximal heterogeneity.
    Keywords: heterogeneity; applied microeconometrics; fixed effects; dyanamic discrete choice
    JEL: C30 C33 C51
    Date: 2006–01
  5. By: Mads Meier Jæger (The Danish National Institute of Social Research); Anders Holm (Department of Sociology, University of Copenhagen)
    Abstract: The aim of this paper is investigate the extent to which monetary and non-monetary social background factors explain intergenerational educational attainment in Denmark. The main hypothesis tested is that non-monetary social background factors (cultural, social, and cognitive parental resources) are particularly important relative to economic factors within the institutional context of the comprehensive and highly redistributive Danish welfare state. Drawing on the notion of ‘capital’ by Pierre Bourdieu and a longitudinal Danish data set, we find that parental economic capital is of little importance in explaining educational outcomes, while different non-monetary social background resources, and especially cultural capital, are very important. Our findings then indicate that a particular Scandinavian institutional “mobility regime” may exist in which educational inequalities are predominantly generated by non-monetary forms of stratification. Several suggestions for future research are also discussed.
    Keywords: intergenerational educational mobility; Denmark; mobility regimes; Bourdieu; forms of capital; mixed logit model; concomitant variables; confirmatory factor analysis
  6. By: Jacob Nielsen Arendt (Department of Business and Economics, University of Southern Denmark); Anders Holm (Department of Sociology, University of Copenhagen)
    Abstract: Sample selection and endogeneity are frequent causes of biases in non-experimental empirical studies. In binary models a standard solution involves complex multivariate models. A simple approximation has been shown to work well in bivariate models. This paper extends the approximation to a trivariate model. Simulations show that the approximation outperforms full maximum likelihood while a least squares approximation may be severely biased. The methods are used to estimate the influence of trust in the parliament and politicians on voting- propensity. No previous studies have allowed for endogeneity of trust on voting and it is shown to severely affect the results.
    Keywords: endogeneity; multivariate probit; approximation; Monte Carlo simulation
    Date: 2006–02
  7. By: Nicole M. Boyson; Christof W. Stahel; Rene M. Stulz
    Abstract: We examine whether hedge funds experience contagion. First, we consider whether extreme movements in equity, fixed income, and currency markets are contagious to hedge funds. Second, we investigate whether extreme adverse returns in one hedge fund style are contagious to other hedge fund styles. To conduct this examination, we estimate binomial and multinomial logit models of contagion using daily returns on hedge fund style indices as well as monthly returns on indices with a longer history. Our main finding is that there is no evidence of contagion from equity, fixed income, and foreign exchange markets to hedge funds, except for weak evidence of contagion for one single daily hedge fund style index. By contrast, we find strong evidence of contagion across hedge fund styles, so that hedge fund styles tend to have poor coincident returns.
    JEL: G11 G12 G18
    Date: 2006–03
  8. By: Nadja Silberhorn; Yasemin Boztug; Lutz Hildebrandt
    Abstract: Due to its ability to allow and account for similarities betweenpairs of alternatives, the nested logit model is increasingly used in practical applications. However the fact that there are two different specifications of the nested logit model has not received adequate attention. The utility maximization nested logit (UMNL) model and the non-normalized nested logit (NNNL) model have different properties, influencing the estimation results in a different manner. As the NNNL specification is not consistent with random utility theory (RUT), the UMNL form is preferred. This article introduces distinct specifications of the nested logit model and indicates particularities arising from model estimation. Additionally, it demonstrates the performance ofsimulation studies with the nested logit model. In simulation studies with the nested logit model using NNNL software (e. g. PROC MDC in SAS(c) ), it must be pointed out that the simulation of the utility function´s error terms needs to assume RUT-conformity. But as the NNNL specification is not consistent with RUT, the input parameters cannot be reproduced without imposing restrictions. The effects of using various software packages on the estimation results of a nested logit model are shown on the basis of a simulation study.
    Keywords: nested logit model, utility maximization nested logit, non-normalized nested logit, simulation study
    Date: 2006–02

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