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Specification Testing in Random Coefficient Models

Christoph Breunig and Stefan Hoderlein
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Christoph Breunig: Humboldt University Berlin

No 77, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: In this paper, we suggest and analyze a new class of specification tests for random coefficient models. These tests allow to assess the validity of central structural features of the model, in particular linearity in coefficients, generalizations of this notion like a known nonlinear functional relationship, or degeneracy of the distribution of a random coefficient, i.e., whether a coefficient is fixed or random, including whether an associated variable can be omitted altogether. Our tests are nonparametric in nature, and use sieve estimators of the characteristic function. We provide formal power analysis against global as well as against local alternatives. Moreover, we perform a Monte Carlo simulation study, and apply the tests to analyze the degree of nonlinearity in a heterogeneous random coefficients demand model. While we find some evidence against the popular QUAIDS specification with random coefficients, it is not strong enough to reject the specification at the conventional significance level.

Keywords: nonparametric; specification; testing; random coefficients; unobserved heterogeneity; sieve estimation; characteristic function; consumer demand (search for similar items in EconPapers)
Date: 2018-03-05
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Journal Article: Specification testing in random coefficient models (2018) Downloads
Working Paper: Specification Testing in Random Coefficient Models Downloads
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