Discrete choice models with multiplicative error terms

Mogens Fosgerau () and M. Bierlaire

Transportation Research Part B: Methodological, 2009, vol. 43, issue 5, pages 494-505

Abstract: The conditional indirect utility of many random utility maximization (RUM) discrete choice models is specified as a sum of an index V depending on observables and an independent random term [epsilon]. In general, the universe of RUM consistent models is much larger, even fixing some specification of V due to theoretical and practical considerations. In this paper, we explore an alternative RUM model where the summation of V and [epsilon] is replaced by multiplication. This is consistent with the notion that choice makers may sometimes evaluate relative differences in V between alternatives rather than absolute differences. We develop some properties of this type of model and show that in several cases the change from an additive to a multiplicative formulation, maintaining a specification of V, may lead to a large improvement in fit, sometimes larger than that gained from introducing random coefficients in V.

Keywords: Discrete; choice; Multiplicative; specification; Multivariate; extreme; value; Random; scale; Heteroscedasticity (search for similar items in EconPapers)
Date: 2009

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