DP15719 Identification of Dynamic Discrete-Continuous Choice Models, with an Application to Consumption-Savings-Retirement

Author(s): Matthew Levy, Pasquale Schiraldi
Publication Date: January 2021
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Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15719

This paper studies the non-parametric identification of the discount factor and utility function in the class of dynamic discrete-continuous choice (DDCC) models. In contrast to the discrete-only model we show the discount factor is identified. Our results further highlight why Euler equation estimation approaches that ignore agents' discrete choices are inconsistent. We estimate utility and discount factors for a consumption- savings-retirement choice problem using the Panel Study of Income Dynamics (PSID). We show that the relative risk aversion parameter and the intertemporal elasticity of substitution are separately identified, and that the latter varies across agents due to the wealth-dependence of the surplus from the discrete choice. This surplus also implies that the value function may be locally convex in wealth, and we find that a simulated Universal Basic Income (UBI) policy counterintuitively benefits wealthier working households more than poorer ones due to this effect.