Tests for Price Endogeneity in Differentiated Product Models

Kyoo il Kim () and Petrin Amil
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Petrin Amil: Department of Economics, University of Minnesota, 4-101 Hanson Hall, 1925 4th Street South, Minneapolis, MN 55455, USA

Journal of Econometric Methods, 2015, vol. 4, issue 1, 47-69

Abstract: We develop simple tests for endogenous prices arising from omitted demand factors in discrete choice models. Our approach only requires one to locate testing proxies that have some correlation with the omitted factors when prices are endogenous. We use the difference between prices and their predicted values given observed demand and supply factors. If prices are exogenous, these proxies should not explain demand given prices and other explanatory variables. We reject exogeneity if these proxies enter significantly in utility as additional explanatory variables. The tests are easy to implement as we show with several Monte Carlos and discuss for three recent demand applications.

Keywords: control function; discrete choice demand; endogenous price; LM test; testing; unobserved demand factor; Wald test (search for similar items in EconPapers)
JEL-codes: C3 L0 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Working Paper: Tests for Price Endogeneity in Differentiated Product Models (2013)
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DOI: 10.1515/jem-2012-0002

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