A Test of the Extreme Value Type I Assumption in the Bus Engine Replacement Model

Abstract

Nearly every dynamic discrete choice model relies, for computational simplicity, on the assumption that underlying utility shocks are distributed extreme value type I. In this note we test this assumption in the context of the Rust (1987) classical model of bus engine replacement and find that, for most specifications tested, extreme value type I errors cannot be rejected. In a case where extreme value type I errors can be rejected, our more flexible estimation yields significantly different choice probabilities at some regions of the state space.

Keywords: Dynamic discrete choice, Extreme value type I

JEL Classification: C25, C61