[Discrete choice models are now used in a variety of situations in applied econometrics. By far the model specification which is used most often is the multinomial logit model. Yet it is widely known that a potentially important drawback of the multinomial logit model is the independence from irrelevant alternatives property. While most analysts recognize the implications of the independence of irrelevant alternatives property, it has remained basically a maintained assumption in applications. In the paper we provide two sets of computationally convenient specification tests for the multinomial logit model. The first test is an application of the Hausman [10] specification test procedure. The basic idea for the test here is to test the reverse implication of the independence from irrelevant alternatives property. The test statistic is easy to compute since it only requires computation of a quadratic form which involves the difference of the parameter estimates and the differences of the estimated covariance matrices. The second set of specification tests that we propose is based on more classical test procedures. We consider a generalization of the multinomial logit model which is called the nested logit model. Since the multinomial logit model is a special case of the more general model when a given parameter equals one, classical test procedures such as the Wald, likelihood ratio, and Lagrange multiplier tests can be used. The two sets of specification test procedures care then compared for an example where exact and approximate comparisons are possible.]

The authors extend Daniel McFadden's (1989) method of simulated moments to approximating efficient estimators in general estimation problems. The general approach applies a simulated bias correction to an approximation of the efficient score. They discuss a general trade-off in estimator inefficiency between bias correction and moment approximation.

The method of simulated scores (MSS) is presented for estimating limited dependent variables models (LDV) with flexible correlation structure in the unobservables. We propose simulators that are continuous in the unknown parameter vectors, and hence standard optimization methods can be used to compute the MSS estimators that employ these simulators. The first continuous method relies on a recursive conditioning of the multivariate normal density through a Cholesky triangularization of its variance-covariance matrix. The second method combines results about the conditionals of the multivariate normal distribution with Gibbs resampling techniques. We establish consistency and asymptotic normality of the MSS estimators and derive suitable rates at which the number of simulations must rise if biased simulators are used.

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When offered a new product whose attributes are unknown, customers can determine whether they like the product by trying it themselves or can wait to observe the experience of other customers who try the product. The authors specify a rational decision process and investigate the implications of learning from others on the sales of new products and the impact of advertising.

Kenneth E. Train, Daniel L. McFadden, Andrew A. Goett, Consumer Attitudes and Voluntary Rate Schedules for Public Utilities, The Review of Economics and Statistics, Vol. 69, No. 3 (Aug., 1987), pp. 383-391

Consumers’ health plan choices are highly persistent even though optimal plans change over time. This paper separates two sources of inertia, inattention to plan choice and switching costs. We develop a panel data model with separate attention and choice stages, linked by heterogeneity in acuity, i.e., the ability and willingness to make diligent choices. Using data from Medicare Part D, we find that inattention is an important source of inertia but switching costs also play a role, particularly for low-acuity individuals. Separating the two stages and allowing for heterogeneity is crucial for counterfactual simulations of interventions that reduce inertia.

This paper presents a list of the top 20 articles published in the American Economic Review during its first 100 years. This list was assembled in honor of the AER's one-hundredth anniversary by a group of distinguished economists at the request of AER's editor. A brief description accompanies the citations of each article.