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The Invariant Proportion of Substitution Property (IPS) of Discrete-Choice Models

Harvard Business School, Boston, Massachusetts 02163
tsteenburgh{at}hbs.edu

This article introduces a newly discovered property of discrete-choice models, which I call the invariant proportion of substitution (IPS). Like the independence from irrelevant alternatives (IIA) property, IPS implies individual behavior that is counterintuitive in the context of choice among similar alternatives. But models that alleviate the concerns raised by IIA, such as generalized extreme value and covariance probit models, do not necessarily alleviate the concerns raised by IPS. I explore the implications of the IPS property on individual behavior in several choice contexts and discuss some models that alleviate the concerns raised by IPS.

Key Words: econometric models; choice models; logit; probit; generalized extreme value; independence from irrelevant alternatives (IIA); individual choice behavior
History: Received: October 4, 2004;