Download This PaperIdentifying and Estimating Perceived Returns to Binary Investments
60 Pages Posted: 1 Jun 2020 Last revised: 10 Jun 2020
Date Written: May 2, 2020
Abstract
I introduce a new method for estimating agents' perceived returns to binary investments that exploits the mechanical relationship between perceived prices and perceived returns in binary choice settings. Identification is achieved using instruments for prices that are uncorrelated with both price misperceptions and unobserved components of perceived returns. The method provides estimates of perceived returns in terms of compensating variation, which naturally implies effects for subsidies and taxes. These estimates condition on observed characteristics, allowing for heterogeneity in predicted subsidy and tax effects across types of individuals. Because these estimates are of distributions instead of point elasticities, they imply effects that are nonlinear in policy magnitude. I demonstrate the advantages of the new method relative to two related alternatives in a series of data simulations.
Keywords: Biased Beliefs, Moment Inequalities, Returns to Investments, Revealed Preference, Subsidies, Taxes
JEL Classification: C31, D84, D61
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