Estimating Demand with Recentered Instruments

Kirill Borusyak, Mauricio Caceres Bravo and Peter Hull

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Abstract: We develop a new approach to estimating flexible demand models with exogenous supply-side shocks. Our approach avoids conventional assumptions of exogenous product characteristics, putting no restrictions on product entry, despite using instrumental variables that incorporate characteristic variation. The proposed instruments are model-predicted responses of endogenous variables to the exogenous shocks, recentered to avoid bias from endogenous characteristics. We illustrate the approach in a series of Monte Carlo simulations.

Date: 2025-04
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http://arxiv.org/pdf/2504.04056 Latest version (application/pdf)

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Working Paper: Estimating demand with recentered instruments (2025)
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