Estimation of a Heterogeneous Demand Function with Berkson Errors

Richard Blundell; Joel Horowitz; Matthias Parey

doi:10.1162/rest_a_01018

Estimation of a Heterogeneous Demand Function with Berkson Errors

Richard Blundell¹; Joel Horowitz²; Matthias Parey³

¹ University College London and Institute for Fiscal Studies · ² Northwestern University and Cemmap · ³ University of Surrey and Institute for Fiscal Studies

The Review of Economics and Statistics 2022 open access

Abstract Berkson errors are commonplace in empirical microeconomics. In consumer demand, this form of measurement error occurs when the price an individual pays is measured by the (weighted) average price paid by individuals in a group (e.g., a county) rather than the true transaction price. We show the importance of Berkson errors for demand estimation with nonseparable unobserved heterogeneity. We develop a consistent estimator using external information on the true price distribution. Examining gasoline demand in the United States, we document substantial within-market price variability. Accounting for Berkson errors is quantitatively important. Imposing the Slutsky shape constraint reduces sensitivity to Berkson errors.

DOI: 10.1162/rest_a_01018
Volume: 104 (5)
Pages: 877-889
Language: en
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