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Presented By: Department of Economics

Supply and Demand with Market Heterogeneity

Alexander Torgovitsky, University of Chicago

Alexander Torgovitsky Alexander Torgovitsky
Alexander Torgovitsky
We consider the problem of identifying the supply and demand of a single homogeneous good when markets have rich forms of unobserved heterogeneity. We introduce market types---collections of potential equilibrium outcomes across values of an excluded instrumental variable---and use them to develop a new approach to analyzing identification. Through graphical examples, we show how nonparametric, economically-motivated assumptions---such as downward-sloping demand---provide empirical content about natural target parameters. We show that comparable linear IV estimators are systematically attenuated measures of demand, a theoretical prediction confirmed in a well-known dataset. We then analyze random coefficient models with linear supply and demand curves that have heterogeneous slopes and develop a computationally tractable method for computing and estimating sharp bounds. We apply the method to estimate the welfare incidence of sales taxes in the United States.
Alexander Torgovitsky Alexander Torgovitsky
Alexander Torgovitsky

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