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How wrong can you be, without noticing? Further evidence on speci?cation errors in the Conditional Logit

Tomás del Barrio Casto, William Nilsson and Andres Picazo-Tadeo
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Tomás del Barrio Casto: University of the Balearic Islands, Palma de Mallorca

Authors registered in the RePEc Author Service: Tomás del Barrio Castro

No 1318, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: Discrete choice models such as the conditional logit model are widely used tools in applied econometrics and, particularly, in the ?eld of environmental valuation and welfare measurement in order to provide policymakers with sound information for making strategic choices. Monte Carlo simulations are used in this study to analyze biases due to omitted relevant variables and functional form misspeci?cation in the conditional logit model. Using an easy-to-estimate speci?cation test is effective to reduce the risks for large biases. One somewhat discouraging result is, however, that a moderate bias can be found even when the omitted variable is orthogonal to the explanatory variables included. This result is particularly interesting considering the increasing interest in using randomized experiments to obtain causal interpretations of key parameters. Randomization, with independence between included and omitted variables, does not guarantee unbiased estimates in the conditional logit model.

Keywords: Environmental valuation; Welfare measurements; Choice experiments; Monte Carlo analysis; Speci?cation tests (search for similar items in EconPapers)
JEL-codes: C15 C51 C99 D69 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2013-07
New Economics Papers: this item is included in nep-cdm, nep-dcm, nep-ecm and nep-env
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