Estimating demand with recentered instruments

Kirill Borusyak, Peter Hull and Mauricio Caceres Bravo

No 10/25, CeMMAP working papers from Institute for Fiscal Studies

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: 2025-04-07
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Working Paper: Estimating Demand with Recentered Instruments (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:azt:cemmap:10/25

DOI: 10.47004/wp.cem.2025.1025

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