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Publication# Discrete choice models with multiplicative error terms

Abstract

The conditional indirect utility of many random utility maximization (RUM) discrete choice models is specified as a sum of an index V depending on observables and an independent random term P. In general, the universe of RUM consistent models is much larger, even fixing some specification of V due to theoretical and practical considerations. In this paper, we explore an alternative RUM model where the summation of V and E is replaced by multiplication. This is consistent with the notion that choice makers may sometimes evaluate relative differences in V between alternatives rather than absolute differences. We develop some properties of this type of model and show that in several cases the change from an additive to a multiplicative formulation, maintaining a specification of V, may lead to a large improvement in fit, sometimes larger than that gained from introducing random coefficients in V. (C) 2008 Elsevier Ltd. All rights reserved.

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Multiplication

Multiplication (often denoted by the cross symbol , by the mid-line dot operator , by juxtaposition, or, on computers, by an asterisk ) is one of the four elementary mathematical operations of arithmetic, with the other ones being addition, subtraction, and division. The result of a multiplication operation is called a product. The multiplication of whole numbers may be thought of as repeated addition; that is, the multiplication of two numbers is equivalent to adding as many copies of one of them, the multiplicand, as the quantity of the other one, the multiplier; both numbers can be referred to as factors.

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In computer programming, a type system is a logical system comprising a set of rules that assigns a property called a type (for example, integer, floating point, string) to every "term" (a word, phrase, or other set of symbols). Usually the terms are various constructs of a computer program, such as variables, expressions, functions, or modules. A type system dictates the operations that can be performed on a term. For variables, the type system determines the allowed values of that term.

Universe

The universe is all of space and time and their contents, including planets, stars, galaxies, and all other forms of matter and energy. The Big Bang theory is the prevailing cosmological description of the development of the universe. According to this theory, space and time emerged together 13.787billion years ago, and the universe has been expanding ever since the Big Bang. While the spatial size of the entire universe is unknown, it is possible to measure the size of the observable universe, which is approximately 93 billion light-years in diameter at the present day.

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