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Reduced-Form versus Structural Models of Water Demand under Nonlinear Prices

Sheila M. Olmstead
Journal of Business & Economic Statistics
Vol. 27, No. 1 (Jan., 2009), pp. 84-94
Stable URL: http://www.jstor.org/stable/27639021
Page Count: 11
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Reduced-Form versus Structural Models of Water Demand under Nonlinear Prices
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Abstract

Increasing-block prices are common in markets for water, cellular phone service, and retail electricity. This study estimates demand models under block prices and conducts a Monte Carlo experiment to test the small-sample bias of structural and instrumental variables (IV) estimators. We estimate the price and income elasticity of water demand under increasing-block prices using a structural discrete/continuous choice (DCC) model, as well as random effects and IV. Elasticity estimates are sensitive to the modeling framework. The Monte Carlo experiment suggests that IV and DCC models estimate both price and income elasticity with bias, with no clear best choice among estimators.

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