Testing The Consistency of Nested Logit Models with Utility Maximization

Joseph Herriges and Catherine Kling

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The Nested Multinomial Logit (NMNL) model is used extensively in modeling consumer choices among discrete alternatives when the number of alternatives is large. Unfortunately, applied researchers often find that estimated NMNL models fail to meet the Daly-ZacharyMcFadden (DZM) sufficient conditions for consistency with stochastic utility maximization. Borsch-Supan (1990) provides a relaxed set of conditions to test for consistency. While these conditions are increasingly cited, they are seldom tested. This paper corrects and extends BorschSupan's Theorem 2, providing simple necessary conditions on first, second, and third derivatives of choice probabilities and a graph oft he bounds they place on dissimilarity parameters.

Date: 1994-09-08
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Related works:
Journal Article: Testing the consistency of nested logit models with utility maximization (1996)
Working Paper: Testing the Consistency of Nested Logit Models with Utility Maximization (1996)
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