MULTINOMIAL REGRESSION MODELS

MULTINOMIAL REGRESSION MODELS (MRM)

Ø When the individual has to choose among several discrete
alternatives, use multinomial regression models (MRM),
which assume independence of irrelevant alternatives
(IIA). Some examples are:
Ø 1. Transportation choices: Car, bus, railroad, bicycle
Ø 2. Religion choices: Christianity, Judaism, Islam, Hinduism,
Buddhism, other
Ø 3. Choice of education: High school, college, post-graduate
Ø 4. Choice of Job: Do not work, work part time, or work full time
Ø 5. Buying a car: American, Japanese, European
 MULTINOMIAL REGRESSION MODELS (MRM)
Ø Consider the nominal or unordered MRM.
Ø For transportation choice, use the nominal MRM because there
is no particular (natural) order among the various options.
Ø Three types of models:
Ø 1. Nominal MRM for chooser-specific data
Ø 2. Nominal MRM for choice-specific data
Ø 3. Nominal MRM for chooser-specific and choice-specific data,
or mixed nominal MRM
Ø Chooser represents an individual who has to choose among several
alternatives.
Ø Choice represents the alternatives or options that face an individual.
 MULTINOMIAL LOGIT (MLM) OR
MULTINOMIAL PROBIT MODELS (MPM)
Ø These models are used for chooser-specific data.
Ø These models answer: How do the choosers’
characteristics affect their choosing a particular
alternative among a set of alternatives?
Ø MLM or MPM is suitable when regressors vary across
individuals.
 MULTINOMIAL LOGIT (MLM)
Ø Generalize logit model as follows:
Ø Choose a base category and set the coefficients equal to zero.
1
p i1 = a2 +b2 X i a 3 + b3 X i
1+ e +e
a2 +b2 X i
e
p i2 = a2 +b2 X i a 3 + b3 X i
1+ e +e
a 3 + b3 X i
e
p i3 = a2 +b2 X i a 3 + b3 X i
1+ e +e
 MULTINOMIAL LOGIT (CONT.)
Ø Take log of odds ratios and estimate equations
simultaneously using maximum likelihood (ML):
æ p i2 ö
lnçç ÷÷ = a 2 + b 2 X i
è p i1 ø
æ p i3 ö
lnçç ÷÷ = a 3 + b 3 X i
è p i1 ø
p i1 = 1 - p i 2 - p i 3
 CONDITIONAL LOGIT (CLM) OR
CONDITIONAL PROBIT (CPM) MODELS
Ø These models are used for choice-specific data.
Ø These models answer: How do the characteristics or
features of various alternatives affect individuals’
choice among them?
Ø CLM or CPM is appropriate when regressors vary
across alternatives.
 CONDITIONAL LOGIT MODEL (CLM)
Ø Generalize the logit model as follows:
ØUnlike with MLM, the coefficients α and β do not vary
across choices, yet the added subscript j for an
individual varies across the alternatives.
a + bX ij
e
p ij = J

åe
m =1
a + bX im

ØEstimated using maximum likelihood.

 MIXED MRM

Ø Models used when we have data on both chooser-

specific and choice-specific characteristics.
Ø Such models can also be estimated by the
conditional logit model by adding appropriate
dummy variables.
Ø For example, in choosing cars, features of the cars as
well as income and age of individuals may affect
their choice of car.
 MIXED LOGIT (MXL)
Ø To incorporate subject-specific characteristics in the
analysis, MXL proceeds as follows:
Ø Interact the subject-specific variables with the
choice-specific characteristics.
Ø Estimate model using CLM.
 Reference

Damodar Gujarati
Econometrics by Example, second edition