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Substitution Patterns Of The Random Coefficients Logit

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Executive Summary

Previous research suggests that the random coefficients logit is a highly flexible model that overcomes the problems of the homogeneous logit by allowing for differences in tastes across individuals. The purpose of this paper is to show that this is not true. Author proves that the random coefficients logit imposes restrictions on individual choice behavior that limit the types of substitution patterns that can be found through empirical analysis, and it raises fundamental questions about when the model can be used to recover individuals' preferences from their observed choices. Part of the misunderstanding about the random coefficients logit can be attributed to the lack of cross-level inference in previous research.

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