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 where the choice decision is defined in terms of a set of alternatives (commodities) differentiated mainly by their quality attributes rather than just prices, and individuals making the choice decisions are differentiated by their socio-economic characteristics rather than just income level. DC models therefore are rich in details which are important for policies analysis at a micro or intra-sectoral level (e.g., transport sector, housing sector). In contrast, continuous demand (CD) models are specialized in describing behaviour at an aggregate (inter-sectoral) level (e.g. trade-off between transport and land-use activities). DC and CD models are therefore complements rather than substitutes and increasingly, there is a need to integrate the use of both types of models especially in an economy-wide model to look at the impacts of policies which are implemented at a microeconomic level (e.g. investment in a particular transport network) and yet having impacts which are measured adequately only at an economy-wide level. This paper presents a methodology for integrating the use of DC and CD models in the framework of a computable general equilibrium (economy-wide) model. The paper also illustrates the application of this methodology suggested in an empirical example, taken from a study of the investment in the Northwest Rail network in the Sydney Metropolitan Area (Australia).