On asymptotic size distortions in the random coefficients logit model

We show that, in the random coefficients logit model, standard inference procedures can suffer from asymptotic size distortions. The problem arises due to boundary issues and is aggravated by the standard parameterization of the model, in terms of standard deviations. For example, in case of a single random coefficient, the asymptotic size of the nominal 95% confidence interval obtained by inverting the two-sided t-test for the standard deviation equals 83.65%. In seeming contradiction, we also show that standard error estimates for the estimator of the standard deviation can be unreasonably large. This problem is alleviated if the model is reparameterized in terms of variances. Furthermore, a numerical evaluation of a conjectured lower bound suggests that the asymptotic size of the nominal 95% confidence interval obtained by inverting the two-sided t-test for variances (means) is within 0.5 percentage points of the nominal level as long as there are no more than five (four) random coefficients and as long as an optimal weighting matrix is employed.