Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity

34 Pages Posted: 15 Mar 2014  

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Nathan Yang

McGill Desautels Faculty of Management

Date Written: March 14, 2014

Abstract

This paper offers a new identification strategy for disentangling structural state dependence from unobserved heterogeneity in preferences. Our strategy exploits market environments where there is a choice-consumption mismatch. We first demonstrate the effectiveness of our identification strategy in obtaining unbiased state dependence estimates via Monte Carlo analysis and highlight its superiority relative to the extant choice-set variation based approach. In an empirical application that uses data of repeat transactions from the car rental industry, we find evidence of structural state dependence, but show that state dependence effects may be overstated without exploiting the choice-consumption mismatches that materialize through free upgrades.

Keywords: Consumer dynamics, Heterogeneity, Quasi-experiment econometrics, Service industry, State dependence

JEL Classification: C1, C5, L00, L80, M2, M3

Suggested Citation

Sudhir, K. and Yang, Nathan, Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity (March 14, 2014). Cowles Foundation Discussion Paper No. 1941. Available at SSRN: https://ssrn.com/abstract=2409115

K. Sudhir (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

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Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Nathan Yang

McGill Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-378-6233 (Phone)

HOME PAGE: http://www.mcgill.ca/desautels/nathan-yang

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