Identifying the Discount Factor of Forward Looking Consumers Based on Consumption from Inventory
49 Pages Posted: 24 May 2014 Last revised: 9 Apr 2015
Date Written: April 2015
In this paper we study the identification of discrete choice models of dynamically optimizing consumers. We first provide additional formal results for existing identification solutions. We then investigate the ‘last in, last out’ (LILO) constraint on consuming from the inventory as a means to identifying the discount factor in these models. We find that the LILO constraint (over-)identifies the discount parameter in the absence of assumptions about consumers’ expectations and show how LILO results in efficient estimates in a parametric, maximum likelihood framework using simulated data. Finally, we report survey based empirical evidence for the relevance of LILO strategies in four different categories.
Keywords: dynamic models, discount factor, identification, inventory
JEL Classification: C25, C51, D12
Suggested Citation: Suggested Citation