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Demand analysis under latent choice constraints

Working Paper

Nikhil Agarwal, Paulo Somaini

April 2022

Consumer choices are constrained in many markets due to either supply-side rationing or information frictions. Examples include matching markets for schools and colleges; entry-level labor markets; limited brand awareness and inattention in consumer markets; and selective admissions to healthcare services. Accounting for these choice constraints is essential for estimating consumer demand. The researchers use a general random utility model for consumer preferences that allows for endogenous characteristics and a reduced-form choice-set formation rule that can be derived from models of the examples described above. The choice-sets can be arbitrarily correlated with preferences. Studying non-parametric identification of this model, the researchers propose an estimator, and apply these methods to study admissions in the market for kidney dialysis in California. The results establish identification of the model using two sets of instruments, one that only affects consumer preferences and the other that only affects choice sets. Moreover, these instruments are necessary for identification. They find that dialysis facilities are less likely to admit new patients when they have higher than normal caseload and that patients are more likely to travel further when nearby facilities have high caseloads. Finally, the researchers estimate consumers’ preferences and facilities’ rationing rules using a Gibbs sampler.