Ridge regression estimation of the Rotterdam model

The best guesses of unknown coefficients specified in Theil's model of introspection are like predictions and not like de Finetti's prevision and therefore not the values taken by random variables. Constrained least squares procedures can be formulated which are free of these difficulties. The ridge estimator is a simple version of a constrained least squares estimator which can be made operational even when little prior information is available. Our operational ridge estimators are nearly minimax and are not less stable than least squares in the presence of high multicollinearity. Finally, we have presented the ridge estimates for the Rotterdam demand model.