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 enable us to “difference out” the true but unobserved choice sets. We can then 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.
This is an updated version of CEPR DP 11675.
Authors
CPP Co-Director, IFS Research Director
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.
Research Associate University of Bristol
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.
Research Associate University of Zurich
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 .
Report details
- Publisher
- The IFS
Suggested citation
G, Crawford and R, Griffith and A, Iaria. (2017). Preference estimation with unobserved choice set heterogeneity using sufficient sets. London: The IFS. Available at: https://ifs.org.uk/publications/preference-estimation-unobserved-choice-set-heterogeneity-using-sufficient-sets (accessed: 19 March 2024).
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