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Estimating Price Elasticities with Non-Linear Errors in Variables

Aug 2009
Working Paper
08-045
By  Aprajit Mahajan
This paper estimates a price elasticity using a exible demand specification on survey data where prices are observed with error are correlated with household characteristics. The demand function is modelled as being a polynomial (and more generally also including trigonometric terms) in the unobserved true prices and the form of the dependency between the observed (mismeasured) prices and household characteristics is modelled parametrically. I identify and estimate the model by adapting the approach of Hausman, Newey, Ichimura, and Powell (1991) and Schennach (2004). The exible specifications allow us to observe that price elasticities vary across the price distribution, something missed in previous work using linear demand specifications.