DMS Statistics and Data Science Seminar

Speaker: Wenying Li, Auburn University,  Assistant Professor of Agriculture Economics

Title: Dimension Reduction: Addressing Aggregation Bias in Large Consumer Demand Systems

Abstract: Building on an insight of Lewbel (1996) that aggregation bias is a special case of the omitted variable bias, we propose two strategies for reducing bias in inconsistently aggregated consumer demand systems. The first uses a penalized lasso approach and the second relies on a residual-based instrumental variable technique to control for the correlation between group prices and the residual in an aggregate demand. In an example, the preferred strategy reduces bias by up to 91% in own-price elasticities and 57% in cross-price elasticities. These strategies are useful to situations where an inconsistently aggregated demand has to be used for practical purposes.