Which Models Can We Trust to Evaluate Consumer Decision Making? Comment on “Choice Inconsistencies Among the Elderly”

66 Pages Posted: 27 Jul 2015 Last revised: 10 Jun 2021

See all articles by Jonathan Ketcham

Jonathan Ketcham

Arizona State University (ASU) - Marketing Department

Nicolai Kuminoff

Arizona State University (ASU) - Economics Department

Christopher Powers

Centers for Medicare and Medicaid Services

Date Written: July 2015

Abstract

Neoclassical and psychological models of consumer behavior often make divergent predictions for the welfare effects of paternalistic policies, leaving wide scope for researchers’ choice of a model to influence their policy conclusions. We develop a framework to reduce this model uncertainty and apply it to administrative data on consumer decision making in Medicare Part D. Consumers’ choices for prescription drug insurance plans can be explained by Abaluck and Gruber’s (AER 2011) model of utility maximization with psychological biases or by a neoclassical version of their model that precludes such biases. We evaluate these competing hypotheses using nonparametric tests of utility maximization and a trio of model validation tests. We find that 79% of enrollment decisions in Medicare Part D from 2006-2010 satisfied basic axioms of consumer preference theory under the assumptions of full information, zero transaction cost, and no measurement error. The validation tests provide evidence against widespread psychological biases. In particular, we find that precluding psychological biases improves the structural model’s out-of-sample predictions for consumer behavior.

Suggested Citation

Ketcham, Jonathan D. and Kuminoff, Nicolai and Powers, Christopher, Which Models Can We Trust to Evaluate Consumer Decision Making? Comment on “Choice Inconsistencies Among the Elderly” (July 2015). NBER Working Paper No. w21387, Available at SSRN: https://ssrn.com/abstract=2636107

Jonathan D. Ketcham (Contact Author)

Arizona State University (ASU) - Marketing Department ( email )

Tempe, AZ 85287-4106
United States
4809655507 (Phone)

HOME PAGE: http://wpcarey.asu.edu/directory/people/profile.cfm?person=2179827

Nicolai Kuminoff

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Christopher Powers

Centers for Medicare and Medicaid Services ( email )

Building South, Room S3-09-2
Mail Stop S3-02-01
Baltimore, MD 21244-1850
United States

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