A Bookmaker or Market Type Test for Specification in Discrete Choice Models

John J. Beggs

No 636, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper suggests that the predicted probabilities of outcomes given by an estimated discrete choice model by thought of as prices (or bookmaker odds) associated with those outcomes. By buying or selling contracts (gambling) at those prices (odds) it should not be possible to, on average, make a profit if the model is well specified and is generating "correct" prices. This notion then forms the basis of a model specification test.

Pages: 10 pages
Date: 1982-06
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