Application of the ML Hausman approach to the demand of water for residential use: heterogeneity vs two-error specification

Elisabetta Strazzera

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: This paper presents an application of two ML models to the analysis of residential demand of water - the heterogeneity and the two-error model, both apt to model demand in presence of a kinked budget constraint. The heterogeneity model is especially suitable when the distribution is characterized by a strong clustering around the kinks. Since in practice observations can be very close, but not exactly at the kink, its application may require the definition of an interval of data around the kink, so that the observations falling inside this interval are attributed to the kink. We propose a procedure, based upon the estimates obtained from the twoerror model, to define this interval. In this application we find that the heterogeneity model allows to obtain more efficient estimates than the two-error model for the parameter of principal interest, i.e. the coefficient of the price variable.

Keywords: kinked budget; constraint; maximum likelihood; discrete-continuous choice; hausman model; water demand; block pricing (search for similar items in EconPapers)
JEL-codes: C24 C51 D12 Q25 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dcm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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