A Nested Logit Model of Space and Water Heat System Choice

This paper estimates a nested logit model for space heat and water heat choice using data from the 1980 Pacific Northwest Energy Survey (PNW). The estimated structure involves six alternative space heat systems and three alternative water heat fuel types. Operating and capital costs are predicted for each residence using an energy thermal model.

To relax the Independence of Irrelevant Alternatives assumption we employ a family of nested logit models. We illustrate the two-step estimation method and use a Lagrange multiplier test for nested logit structure. Finally, we use the estimated models to forecast the market shares of alternative space heat systems under an assumed scenario for the course of relative fuel prices.