Random Coefficient Models: Theory and Applications

This paper provides an overview of the rationale behind, and the implementation, and uses of, the random coefficient approach to econometric modelling. A simple random coefficient model is presented, and methods for estimating, testing, and validating such a model are described. A more general model is then presented. The general model is shown to include several fixed‐coefficient models as special cases and can be estimated incorporating a variety of judgements concerning simplification. Finally, the paper reviews recent applications of random coefficient estimation.