Discrete choice models with multiplicative error terms

Fosgerau, Mogens and Bierlaire, Michel (2009): Discrete choice models with multiplicative error terms. Published in: Transportation Research Part B , Vol. 43, No. 5 (2009): pp. 494-505.

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 e. 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.

• Item Type: MPRA Paper
• Institution: Technical University of Denmark
• Language: English
• Keywords: Discrete choice; Multiplicative specification; Multivariate extreme value; Random scale; Heteroscedasticity
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities

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