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Berkson errors are commonplace in empirical microeconomics and occur whenever we observe an average in a specified group rather than the true individual value. In consumer demand this form of measurement error is present because the price an individual pays is often measured by the average price paid by individuals in a specified group (e.g., a county). We show the importance of such measurement errors for the estimation of demand in a setting with nonseparable unobserved heterogeneity. We develop a consistent estimator using external information on the true distribution of prices. Examining the demand for gasoline in the U.S., accounting for Berkson errors is found to be quantitatively important for estimating price effects and for welfare calculations. Imposing the Slutsky shape constraint greatly reduces the sensitivity to Berkson errors.
Authors

CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.

Northwestern University

Research Fellow University of Surrey
Matthias is a research Fellow of the IFS, a Professor in the School of Economics at the University of Surrey and a Research Fellow at the IZA.
Working Paper details
- DOI
- 10.1920/wp.cem.2018.6718
- Publisher
- The IFS
Suggested citation
R, Blundell and J, Horowitz and M, Parey. (2018). Estimation of a nonseparable heterogenous demand function with shape restrictions and Berkson errors. London: The IFS. Available at: https://ifs.org.uk/publications/estimation-nonseparable-heterogenous-demand-function-shape-restrictions-and-berkson (accessed: 23 June 2025).
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