Linking Discrete Choice to Continuous Demand in a Spatial Computable General Equilibrium Model

Abstract

Discrete choice (DC) models are often used to describe consumer behaviour at a disaggregate level. At this level, a choice decision is defined in terms of a set of alternatives representing different ‘varieties’ of a particular product differentiated mainly by their quality attributes rather than just prices. Individuals making these choice decisions are also differentiated by their socioeconomic characteristics rather than just income level. DC models therefore are rich in details which are relevant for policies at a microeconomic and intra-sectoral level. In contrast, continuous demand (CD) models are specialized in describing aggregate behaviour at an intersectoral level. DC and CD models are therefore complements rather than substitutes and increasingly, there is a need to combine the use of both types of models to look at activities at a microeconomic and intra-sectoral level but at the same time measuring the impacts of these activities at a macroeconomic and economy-wide level. Using both of these types of models within a single framework (such as that of a spatial general equilibrium model) requires solutions to some theoretical and empirical issues because the two types of models are based on different theoretical approaches and also use different types of data. This paper looks at these issues and presents a way of overcoming the differences and combines the specializations of both types of models in a coherent and consistent manner. The paper also presents an empirical study to illustrate the usefulness of the methodology suggested.