Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement



Conditional on βn, the probability that a manager of a facility with Tn regulated

units makes the observed Tn compliance choices is:

τn

PUn = i)pRpt(β) = ∏

t=l


eβn'xnU

(7)


Jnt
eβJχnjt
J=l

where i is a Tn * 1 dimensional vector denoting the sequence of observed choices.

Unconditional choice probabilities are derived by integrating conditional choice prob-
abilities over the distribution of unobserved random parameters (Train, 2003). The
θ vector of unknown parameters describes the distribution of β. The parameter esti-
mates are those that maximize the following log likelihood function:

ɪ 7 jn   eβ'χn<t

LL(θ) = ∑ln j ------f (β θ)dβ,

(8)


n=l    t t=l       я'^

—ɔo     ∖ eβ χnjt

J=l

Jnt is the number of viable compliance alternatives available to unit t operated by

manager n. Because this integral does not have a closed form solution, the uncon-
ditional probabilities are approximated numerically through simulation. For each
decision maker, R draws of
β are taken from the density f (β θ)jone for each decision
maker. For each draw, the value of [7] is calculated for each decision maker. The
results are averaged across draws. Simulated maximum likelihood estimates of the
parameters maximize the following:.

N      R Tn

SLL(θ') = £ ln I £||
n=l      r=l t=l


eβn'n>t

Jnt


(9)


ef,tt

J=l


To increase the accuracy of the simulation, 1000 pseudo-random Halton draws are

20



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