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Title: Identification of intertemporal preferences in history-dependent dynamic discrete choice models

Author(s): Matthew Levy and Pasquale Schiraldi

Publication Date: February 2020

Keyword(s): dynamic discrete choice, identification, quasi-hyperbolic discounting and Time preferences

Programme Area(s): Industrial Organization

Abstract: We study the identification of intertemporal preferences in a stationary dynamic discrete decision model. We propose a new approach which focuses on problems which are intrinsically dynamic: either there is endogenous variation in the choice set, or preferences depend directly on the history. History dependence links the choices of the decision-maker across periods in a more fundamental sense standard dynamic discrete choice models typically assume. We consider both exponential discounting as well as the quasi-hyperbolic discounting models of time preferences. We show that if the utility function or the choice set depends on the current states as well as the past choices and/or states, then time preferences are non-parametrically point-identified separately from the utility function under mild conditions on the data and we may also recover the instantaneous utility function without imposing any normalization on the utility across states.

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Bibliographic Reference

Levy, M and Schiraldi, P. 2020. 'Identification of intertemporal preferences in history-dependent dynamic discrete choice models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14447