Latent Consideration Sets and Continuous Demand Systems

Abstract

This paper develops a theoretically consistent continuous demand system model that incorporates latent, probabilistic consideration sets. In contrast to existing discrete choice consideration models, the proposed model is econometrically tractable with consumption data for many goods. The model’s empirical properties are illustrated with an 89-site recreation data set from the 1994 National Survey of Recreation and the Environment (NSRE). Parameter and welfare estimates suggest that the latent consideration set models fit the data better and may imply a bias-variance tradeoff relative to traditional models.