Dynamic Random Utility

100 Pages Posted: 23 Jun 2017

See all articles by Mira Frick

Mira Frick

Yale University - Cowles Foundation

Ryota Iijima

Yale University - Cowles Foundation

Tomasz Strzalecki

Harvard University - Harvard Institute of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2017

Abstract

Under dynamic random utility, an agent (or population of agents) solves a dynamic decision problem subject to evolving private information. We analyze the fully general and non-parametric model, axiomatically characterizing the implied dynamic stochastic choice behavior. A key new feature relative to static or i.i.d. versions of the model is that when private information displays serial correlation, choices appear history dependent: different sequences of past choices reflect different private information of the agent, and hence typically lead to different distributions of current choices. Our axiomatization imposes discipline on the form of history dependence that can arise under arbitrary serial correlation. Dynamic stochastic choice data lets us distinguish central models that coincide in static domains, in particular private information in the form of utility shocks vs. learning, and to study inherently dynamic phenomena such as choice persistence. We relate our model to specifications of utility shocks widely used in empirical work, highlighting new modeling tradeoffs in the dynamic discrete choice literature. Finally, we extend our characterization to allow past consumption to directly affect the agent's utility process, accommodating models of habit formation and experimentation.

Keywords: Dynamic stochastic choice, Random utility, History dependence, Serially correlated utilities, Consumption persistence, Learning

JEL Classification: D81, D83, D90

Suggested Citation

Frick, Mira and Iijima, Ryota and Strzalecki, Tomasz, Dynamic Random Utility (June 21, 2017). Cowles Foundation Discussion Paper No. 2092, Available at SSRN: https://ssrn.com/abstract=2991300 or http://dx.doi.org/10.2139/ssrn.2991300

Mira Frick (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Ryota Iijima

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Tomasz Strzalecki

Harvard University - Harvard Institute of Economic Research ( email )

Department of Economics
200 Littauer Center
Cambridge, MA 02138
United States

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