We present a method to estimate preferences in the presence of unobserved choice set heterogeneity. We build on the insights of Chamberlain's Fixed-Effect Logit and exploit information in observed purchase decisions in either panel or cross-section environments to construct "sufficient sets" of choices that lie within consumers' true but unobserved choice sets. This allows us to recover preference parameters without having to specify the process of choice set formation. We illustrate our ideas by estimating demand for chocolate bars on-the-go using individual-level data from the UK. Our results show that failing to account for unobserved choice set heterogeneity can lead to statistically and economically significant biases in the estimation of preference parameters.
Authors
Rachel Griffith
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
Alessandro Iaria
Alessandro is a Research Associate at the IFS, a Senior Lecturer in Economics at the University of Bristol and a Research Affiliate at CEPR IO.
Greg Crawford
Greg Crawford is a Research Associate of the IFS, a Research Fellow at the CEPR and a Professor of Economics at the University of Zurich .
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