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Application of the ML Hausman approach to the demand of water for residential use: heterogeneity vs two-error specification

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  • E. Strazzera

Abstract

This paper presents an application of two ML models to the analysis of residential demand of water - the heterogeneity and the two-error model, both apt to model demand in presence of a kinked budget constraint. The heterogeneity model is especially suitable when the distribution is characterized by a strong clustering around the kinks. Since in practice observations can be very close, but not exactly at the kink, its application may require the definition of an interval of data around the kink, so that the observations falling inside this interval are attributed to the kink. We propose a procedure, based upon the estimates obtained from the twoerror model, to define this interval. In this application we find that the heterogeneity model allows to obtain more efficient estimates than the two-error model for the parameter of principal interest, i.e. the coefficient of the price variable.

Suggested Citation

  • E. Strazzera, 2006. "Application of the ML Hausman approach to the demand of water for residential use: heterogeneity vs two-error specification," Working Paper CRENoS 200604, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:200604
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    References listed on IDEAS

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    1. Herriges, Joseph A & King, Kathleen Kuester, 1994. "Residential Demand for Electricity under Inverted Block Rates: Evidence from a Controlled Experiment," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 419-430, October.
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    3. Herriges, Joseph A. & King, K.A., 1994. "Residential Demand for Electricity Under Block Rate Structures: Evidence from a Controlled Experiment," Staff General Research Papers Archive 1498, Iowa State University, Department of Economics.
    4. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    5. Olmstead, Sheila & Hanemann, Michael & Stavins, Robert, 2005. "Do Consumers React to the Shape of Supply? Water Demand Under Heterogeneous Price Structures," Working Paper Series rwp05-039, Harvard University, John F. Kennedy School of Government.
    6. Céline Nauges & Alban Thomas, 2000. "Privately Operated Water Utilities, Municipal Price Negotiation, and Estimation of Residential Water Demand: The Case of France," Land Economics, University of Wisconsin Press, vol. 76(1), pages 68-85.
    7. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
    8. Bar-Shira, Ziv & Finkelshtain, Israel & Simhon, Avi, 2005. "Regulating Irrigation Via Block-Rate Pricing: An Econometric Analysis," Discussion Papers 14982, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    9. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-139, Spring.
    10. Ellen M. Pint, 1999. "Household Responses to Increased Water Rates during the California Drought," Land Economics, University of Wisconsin Press, vol. 75(2), pages 246-266.
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    Cited by:

    1. Lucia Cecchi & Enrico Conti & Letizia Ravagli, 2022. "The determinants of domestic water demand and the equity of tariffs: Empirical evidence from an Italian municipality," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2022(3), pages 373-395.

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    More about this item

    Keywords

    water demand; block pricing; kinked budget; constraint; maximum likelihood; discrete-continuous choice; hausman model;
    All these keywords.

    JEL classification:

    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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