capital cost and variable compliance costs are interacted with a restructured electricity
market dummy. Because older plants can be expected to use shorter investment time
horizons (and thus weigh capital costs more heavily), the capital cost variable is also
interacted with plant age. Conditional on observed unit characteristics, coefficients
are not permitted to vary across plants.
The advantage of the CL model is its simplicity, which facilitates hypothesis test-
ing and the estimation of confidence intervals. However, to the extent that there is
unobserved heterogeneity in how plant managers respond to choice attributes, errors
will be correlated and CL coefficient estimates may be significantly biased. The ran-
dom parameter logit (RPL) model does a better job of accommodating unobserved
response heterogeneity. The presence of a standard deviation of β allows coefficients
to vary across plants and facilitates a test of whether managers value cost compo-
nents uniformly versus differentially.24 In the RPL model, the coefficient vector βn
is unobserved for each n and varies in the population with density f (β∖θ). I main-
tain the assumption that the unobserved stochastic term εni is iid extreme value and
independent of βn and xni.
The data used to estimate the model has an unbalanced panel structure. While I
only observe one compliance choice for each coal-fired boiler, an electricity generating
facility or "coal plant" can consist of several, independently operating generating
"units", each comprised of a boiler (or boilers) and a generator. Some facilities only
have one boiler, but there can be as many as ten boilers at a given plant. I assume that
the same manager made compliance decisions for all boilers at a given facility. The β
coefficients are allowed to vary across managers, but are assumed to be constant over
the choices made by a manager. This does not imply that the errors corresponding
to all choices faced by a single manager are perfectly correlated; the independent
extreme value term still enters for each choice.
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