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

10 Pages Posted: 21 Jan 2012  

Bradley Larsen

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); eBay Research Labs

Florian Oswald

Sciences Po - Department of Economics

Gregor Reich

University of Zurich - Department of Business Administration

Dan Wunderli

University of Zurich - Department of Economics; Swiss National Bank

Date Written: December 10, 2011

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

Suggested Citation

Larsen, Bradley and Oswald, Florian and Reich, Gregor and Wunderli, Dan, A Test of the Extreme Value Type I Assumption in the Bus Engine Replacement Model (December 10, 2011). Available at SSRN: https://ssrn.com/abstract=1989027 or http://dx.doi.org/10.2139/ssrn.1989027

Bradley Larsen (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

HOME PAGE: http://www.stanford.edu/~bjlarsen/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

eBay Research Labs ( email )

2065 Hamilton Avenue
San Jose, CA
United States

Florian Oswald

Sciences Po - Department of Economics ( email )

28, rue des Saints peres
Paris, 75007
France

Gregor Reich

University of Zurich - Department of Business Administration ( email )

Moussonstrasse 15
Zurich, 8044
Switzerland

Dan Wunderli

University of Zurich - Department of Economics ( email )

Z├╝rich, CH-8006
Switzerland
+41 44 634 37 38 (Phone)

HOME PAGE: http://web.mac.com/dan.wunderli

Swiss National Bank

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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