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Unobserved Preference Heterogeneity in Demand Using Generalized Random Coefficients

Banff International Research Station for Mathematical Innovation and Discovery

We model unobserved preference heterogeneity in demand systems as random Barten scales in utility functions. These Barten scales appear as random coefficients multiplying prices in demand functions. Consumer demands are nonlinear in prices and may have unknown functional structure. We therefore prove identification of additive Generalized Random Coefficients models, defined as additive nonparametric regressions where each regressor is multiplied by an unobserved random coefficient having an unknown distribution. Using Canadian data, we estimate energy demand functions with and without random coefficient Barten scales. We find that not accounting for this unobserved preference heterogeneity substantially biases estimated consumer-surplus costs of an energy tax.

Mathematics; Statistics; Probability theory and stochastic processes

video/mp4

Author affiliation: Boston College

2017-02-15

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/60588

Unreviewed

http://creativecommons.org/licenses/by-nc-nd/4.0/