Power Law Heteroskedasticity

David Price

Working Papers from University of Toronto, Department of Economics

Abstract: Power laws are common in economics, as in city and firm sizes, and can cause extreme heteroskedasticity. I show that estimators based on observations exhibiting this extreme heteroskedasticity may not be consistent or asymptotically normal and may have unreliable confidence intervals. These problems can occur even without heteroskedasticity if weighted estimators are used. I construct a quasi-maximum likelihood estimator to form more accurate estimates and more reliable inference. This estimator is broadly useful when weighting is considered to improve estimators' precision. Simulations confirm it improves estimation precision and inference, while a replication shows it can lead to substantially different results.

Keywords: heteroskedasticity; power laws; asymptotics; quasi-maximum likelihood (search for similar items in EconPapers)
JEL-codes: C12 C13 C18 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2026-05-26
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