Identification of parameters in normal error component logit‐mixture (NECLM) models

Abstract Although the basic structure of logit‐mixture models is well understood, important identification and normalization issues often get overlooked. This paper addresses issues related to the identification of parameters in logit‐mixture models containing normally distributed error components associated with alternatives or nests of alternatives ( normal error component logit mixture , or NECLM, models). NECLM models include special cases such as unrestricted, fixed covariance matrices; alternative‐specific variances; nesting and cross‐nesting structures; and some applications to panel data. A general framework is presented for determining which parameters are identified as well as what normalization to impose when specifying NECLM models. It is generally necessary to specify and estimate NECLM models at the levels, or structural, form. This precludes working with utility differences, which would otherwise greatly simplify the identification and normalization process. Our results show that identification is not always intuitive; for example, normalization issues present in logit‐mixture models are not present in analogous probit models. To identify and properly normalize the NECLM, we introduce the ‘equality condition’, an addition to the standard order and rank conditions. The identifying conditions are worked through for a number of special cases, and our findings are demonstrated with empirical examples using both synthetic and real data. Copyright © 2007 John Wiley & Sons, Ltd.