Identifying the Discount Factor in Dynamic Discrete Choice Models
Posted: 18 Apr 2016
Date Written: February 2016
The identification of the discount factor in dynamic discrete models is important for counterfactual analysis, but hard. Existing approaches either take the discount factor to be known or rely on high level exclusion restrictions that are difficult to interpret and hard to satisfy in applications, in particular in industrial organization. We provide identification results under an exclusion restriction on primitive utility that is more directly useful to applied researchers. We also show that our and existing exclusion restrictions limit the choice and state transition probability data in different ways; that is, they give the model nontrivial and distinct empirical content.
Keywords: discount factor, dynamic discrete choice, empirical content, identification
JEL Classification: C14, C25, D91, D92
Suggested Citation: Suggested Citation