Industrial Location Modeling: Extending the Random Utility Framework

Given sound theoretical underpinnings, the random utility maximization-based conditional logit model (CLM) serves as the principal method for applied research on industrial location decisions. Studies that implement this methodology, however, confront several problems, notably the disadvantages of the underlying Independence of Irrelevant Alternatives (IIA) assumption. This paper shows that by taking advantage of an equivalent relation between the CLM and Poisson regression likelihood functions one can more effectively control for the potential IIA violation in complex choice scenarios where the decision maker confronts a large number of narrowly defined spatial alternatives. As demonstrated here our approach to the IIA problem is compliant with the random utility (profit) maximization framework. Copyright Blackwell Publishers, 2004