Publications
Publications
- 2023
- HBS Working Paper Series
Estimating Models of Supply and Demand: Instruments and Covariance Restrictions
By: Alexander MacKay and Nathan H. Miller
Abstract
We consider the identification of empirical models of supply and demand with imperfect competition. We show that a covariance restriction on unobserved demand and cost shocks resolves endogeneity and identifies the price parameter. We demonstrate how to employ this approach in estimation, and we provide a comparison to instrumental variables approaches. Our formal results also indicate how weaker assumptions about the covariance term can be used to construct bounds on the price parameter. We illustrate the covariance restriction approach with applications to ready-to-eat cereal, cement, and airlines.
Keywords
Demand Estimation; Identification; Endogeneity Bias; Covariance Restrictions; Ordinary Least Squares; Instrumental Variables
Citation
MacKay, Alexander, and Nathan H. Miller. "Estimating Models of Supply and Demand: Instruments and Covariance Restrictions." Harvard Business School Working Paper, No. 19-051, October 2018. (Revised February 2023. Direct download.)