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This chapter explains the logic of structural econometric models and compares them to other types of econometric models. We provide a framework researchers can use to develop and evaluate structural econometric models. This framework pays particular attention to describing different sources of unobservables in structural models. We use our framework to evaluate several literatures in industrial organization economics, including the literatures dealing with market power, product differentiation, auctions, regulation and entry.

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We describe two methods for correcting for omitted variables in discrete choice models: a fixed effects approach and a control function approach. We apply the methods to disaggregate data on customer’s choice among television options including cable, satellite, and antenna. Estimates are similar for the two methods, and the estimated price response rises substantially when the correction is applied with either method. 1

This paper presents some two-step estimators for a wide range of parametric panel data models with censored endogenous variables and sample selection bias. Our approach is to derive estimates of the unobserved heterogeneity responsible for the endogeneity/selection bias to include as additional explanatory variables in the primary equation. These are obtained through a decomposition of the reduced form residuals. The panel nature of the data allows adjustment, and testing, for two forms of endogeneity and/or sample selection bias. Furthermore, it incorporates roles for dynamics and state dependence in the reduced form. Finally, we provide an empirical illustration which features our procedure and highlights the ability to test several of the underlying assumptions.

Conflicts of interest and efficient contracting in IPOs We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank’s compensation more sensitive to the issuer’s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

This paper examines the relationship between two alternative ap- proaches, namely instrumental variables and control function proce- dures, for estimating the impact of endogenous treatment effects. While it is well known that the two approaches generate comparable estimates the relationship between the estimators, and their accompanying en- dogeneity tests, appears to not be well understood. We show that the two procedures are closely related. We also examine the implications of the two procedures for the underlying economic sorting behavior.

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We estimate a microeconomic model of household asset demands that allows for the fact that households typically have zero holdings of most assets. The adjustments for non-observed heterogeneity generalize methods developed by Dubin and McFadden (1984). Simulating our model using a random sample of US households, we examine distributional and demographic e ects on macroeconomic demands for money, stocks and bonds. JEL classi cation: C35, E41, G11.

We develop an empirical discrete choice interaction model with a finite number of agents. We characterize its equilibrium properties – in particular the correspondence between the interaction strength, the number of agents, and the set of equilibria – and propose to estimate the model by means of simulation methods. In an empirical application, we analyze the individual behavior of some 8000 high school teenagers from almost 500 different school classes. We find endogenous social interaction effects to be strong for behavior closely related to school (truancy), somewhat weaker for behavior partly related to school (smoking, cell phone ownership, and moped ownership) and absent for behavior far away from school (asking parents ’ permission for purchases). Intra-gender interactions are generally much stronger than cross-gender interactions.