Errors in variables in multinomial choice modeling: A simulation study applied to a multinomial logit model of travel mode choice

Modeling travel demand is a vital part of transportation planning and management. Level of service (LOS) attributes representing the performance of transportation system and characteristics of travelers including their households are major factors determining the travel demand. Information on actual choice and characteristics of travelers is obtained from a travel survey at an individual level. Since accurate measurement of LOS attributes such as travel time and cost components for different travel modes at an individual level is critical, they are normally obtained from network models. The network-based LOS attributes introduce measurement errors to individual trips thereby causing errors in variables problem in a disaggregate model of travel demand. This paper investigates the possible structure and magnitude of biases introduced to the coefficients of a multinomial logit model of travel mode choice due to random measurement errors in two variables, namely, access/egress time for public transport and walking and cycling distance to work. A model was set up that satisfies the standard assumptions of a multinomial logit model. This model was estimated on a data set from a travel survey on the assumption of correctly measured variables. Subsequently random measurement errors were introduced and the mean values of the parameters from 200 estimations were presented and compared with the original estimates. The key finding in this paper is that errors in variables result in biased parameter estimates of a multinomial logit model and consequently leading to poor policy decisions if the models having biased parameters are applied in policy and planning purposes. In addition, the paper discusses some potential remedial measures and identifies research topics that deserve a detailed investigation to overcome the problem. The paper therefore significantly contributes to bridge the gap between theory and practice in transport.     

Congestion and Optimal Immigration Policy

This paper presents a model to explain the stylized fact that many countries have a low ratio of migrants in their population while some countries have a high ratio of migrants. Immigration improves the income of the domestic residents, but migrants also increase the congestion of public services. If migrants are unskilled and therefore pay low taxes, and the government does not limit access to these services, then the welfare of the domestic residents decreases with the number of migrants. Visa auctions can lower the cost of immigration control and substitute legal migrants for illegal migrants. If the government decides to limit the access of migrants to public services, immigration control becomes unnecessary and the optimal number of migrants can be very large.     

Advertising,the matchmaker

We empirically study the informational role of advertising in matching consumers with products when consumers are uncertain about both observable and unobserved program attributes. Our focus is on the network television industry, in which the products are television shows. We estimate a model that allows us to distinguish between the direct effect of advertising on utility and its effect through the information set. A notable behavioral implication is that exposure to informational advertising can decrease the consumer’s tendency to purchase the promoted product. The structural estimates imply that an exposure to a single advertisement decreases the consumer’s probability of not choosing her best alternative by approximately 10%. Our results are relevant for industries characterized by product proliferation and horizontal differentiation.     

Public Information Quality with Monopolistic Sellers

We show that in markets with asymmetric information, even if there is full agreement on the choice of optimal information quality, entrusting the choice of (unverifiable) public information quality to traders who benefit from such information leads to inefficiencies. However, delegation of information quality choice to an independent agent who is precluded from sharing in trading profits results in efficient implementation. This result provides a game-theoretic rationale for current institutional arrangements where a private organization that is independent of market traders, the Financial Accounting Standards Board, determines the standards for public disclosures.Journal of Economic LiteratureClassification Numbers: D41, D42, D82.     

Ranking agencies under moral hazard

Summary. We provide rankings across uncertain outputs generated by agents functioning within the Principal-Agent paradigm. For agents who are identical except for their productivity, a necessary (but not sufficient) condition for an agent to be preferred is that her output dominates that of lower agents in the sense of First Degree Stochastic Dominance (FDSD) at every level of effort. Sufficient conditions are based on Blackwells ranking of information systems and involves a characterization of FDSD using stochastic matrices. Our conditions for ranking outputs extends earlier results concerning the value of information within the agency framework. We also show how our techniques can be adapted to rank agents even if the first-order approach for determining optimal contracts fails to hold.Received: April 2, 1996; revised version: October 30, 1996This revised version was published online in February 2005 with corrections to the cover date.     

Equilibrium Unemployment Rate and Customs Union

This paper utilizes the macroeconomics concept of the equilibrium rate of unemployment for theorems on free trade and the formation of customs union. The notion of an equilibrium rate of unemployment appears in the literature on labour, macroeconomics, business cycles and trade theory. Such an equilibrium rate can be derived in a number of ways, for example, by introducing labor–leisure choice in the utility functions of the workers; a labor turnover model and/or by introducing shirking. We extend the two sector-two factor Heckscher–Ohlin–Samuelson model for a small open economy by relaxing the assumption of inelastic labor supply. Specifically, we consider the classical labor supply function obtained from the representative consumer's utility maximisation problem. This consideration allows for the existence of unemployment and we analyse the effects trade policies have on the equilibrium unemployment rate. Given the movement towards free trade (either via the implementation of GATT and/or formation of customs union) it is important to examine its implications for the equilibrium rate of unemployment.     

Auditor Size,Market Segmentation and Litigation Patterns: A Theoretical Analysis

We provide a theoretical rationale for the observed audit industry structure where well-capitalized auditors hold an extremely large market share. Our analysis focuses on the economics of trading in an adverse selection market where audit quality is unobservable. We show that concentration of market share can arise even if well-capitalized auditors have no relative advantage with regard to supplying high-quality audits, and that the strategy of attracting a narrow base of high-margin clients is typically unsustainable in rational expectations equilibrium. Other results derived from our analysis of strategic competition for clients also conform (qualitatively) with empirical findings regarding audit fee structures and litigation rates. In particular, we show that better-capitalized auditors get a dominant market share, produce more accurate reports and are more profitable. In addition, we show that the imposition of high minimum standards increases the market power of wealthy auditors, even though smaller auditors can potentially provide the same level of audit quality at lower fees. All these results are demonstrated within a framework that endogenizes both a securities trading market and profit-maximizing auditors who strategically compete for clients.JEL Classification: C72, D43, D82, K23, K41, L15     

Factor market distortions and gains from trade revisited

Zusammenfassung Gesamtwirtschaftliche Au\enhandelsgewinne bei unvollkommenen Faktorm?rkten. — In diesem Aufsatz werden die Standardtheoreme über die Vorteilhaftigkeit des Au\enhandels unter der Annahme untersucht, da\ auf beiden Faktorm?rkten (für Kapital und Arbeit) intersektorale Faktorpreisunterschiede bestehen. Wenn Unvollkommenheiten auf beiden Faktorm?rkten angenommen werden, ergeben sich Resultate, die erheblich von denen bei Unvollkommenheiten auf nur einem Faktormarkt abweichen. Die interessanteren Ergebnisse der Untersuchung sind: 1. Alle üblichen Theoreme über Wohlfahrtsgewinne aus dem Au\enhandel k?nnen auf einer niedrigeren inferioren Transformationskurve gelten; 2. eine Zunahme (Abnahme) des Verzerrungsgrades kann die Wohlfahrt erh?hen (reduzieren); 3. eine Verbesserung (Verschlechterung) der Terms of Trade kann gr?\ere Wohlfahrtsgewinne (-Verluste) bewirken, als es ohne Verzerrungen der Fall w?re; 4. sollte der Grad der Verzerrung auf dem Kapital- und auf dem Arbeitsmarkt gleich gro\ sein, dann entspricht eine Politik der Produktionsbesteuerung mit Subventionen einer Politik der Faktorbesteuerung mit Subventionen; folglich gibt es dann keine ?second? und ?first best?-Politik.

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Résumé Les distorsions sur les marchés des facteurs de production et les gains de l’échange international. — Cet article examine les théorèmes usuels de gains de l’échange international sous la supposition qu’il y a une différenciation intersectorielle des prix de facteurs sur le marché de capitaux et assi sur le marché du travail. Les imperfections sur les deux marchés conduisent aux résultats qui sont bien différents de ceux qu’on obtient sur la base d’une différenciation des prix de seulement un facteur de production. Les résultats intéressants sont les suivants: (1) Tous les théorèmes usuels de gains de l’échange international sont probablement valables pour des courbes inférieures de transformation; (2) si le degré de la distorsion s’accro?t (décro?t), le bien-être peut s’améliorer (se détériorer); (3) l’amélioration (détérioration) des termes de l’échange peut conduire à une augmentation (diminution) du bien-être qui est plus grande que dans le cas ou il n’y a pas de distorsions; (4) si le degré de la distorsion est aussi haut sur le marché de capitaux que sur le marché du travail, une politique de la taxe sur la production en combinaison des subventions est équivalente à une politique de la taxe sur le facteur en combinaison des subventions; à cause de cela elles cessent d’être une politique de ?second best? et de ?first best?.

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Resumen Revisión de las distorsiones del mercado de factores y de los beneficios del comercio. — Este trabajo examina los teoremas corrientes sobre beneficios del comercio, bajo el supuesto que ambos mercados (capital y trabajo) se caracterizan por una differencia intersectoral en los precios de los factores. Imperfecciones en ambos mercados de factores dan resultados bastante diferentes a los que se obtienen sobre la basis de una ?nica diferencia en el precio de los factores. Los resultados más interesantes son: (1) todos los teoremas corrientes sobre beneficios del comercio pueden ser válidos para las curvas de transformación inferior; (2) un aumento (disminución) del grado de distorsión puede aumentar (disminuir) el bienestar; (3) un mejoramiento (deterioro) en los términos del intercambio puede resultar en una ganancia (pérdida) de bienestar, que es máyor que en el caso en que no hay distorsiones; (4) si el grado de distorsión en ambos mercados, el de capitales y el de trabajo, es igual, entonces una pol?utica de impuestos en combinación con subsidios a la producción se torna equivalente a una politica de impuestos en combinación con subsidios a los factores y, por lo tanto, ellas ya no constituyen más políticas ?second best? y ?first best?.

     

Financial Statements Insurance

The fact that auditors are paid by the companies they audit creates an inherent conflict of interest. We analyze how the provision of financial statements insurance could eliminate this conflict of interest and properly align the incentives of auditors with those of shareholders. We first show that when the benefits to obtaining funding are sufficiently large, the existing legal and regulatory regime governing financial reporting (and auditing) results in low quality financial statements. Consequently, the financial statements of firms are misleading and firms that yield a low rate‐of‐return (low fundamental value) are over‐funded relative to firms characterized by a high rate‐of‐return (high fundamental value). We present a mechanism whereby companies would purchase financial statements insurance that provides coverage to investors against losses suffered as a result of misrepresentation in financial reports. The insurance premia that companies pay for the coverage would be publicized. The insurers appoint and pay the auditors who attest to the accuracy of the financial statements of the prospective insurance clients. For a given level of coverage firms announcing lower premia would distinguish themselves in the eyes of the investors as companies with higher quality financial statements relative to those with higher premia. Every company would be eager to pay lower premia (for a given level of coverage) resulting in a flight to high audit quality. As a result, when financial statements insurance is available and the insurer hires the auditor, capital is provided to the most efficient firms.