Joint Analysis of the Discount Factor and Payoff Parameters in Dynamic Discrete Choice Models

47 Pages Posted: 9 Aug 2017

See all articles by Tatiana Komarova

Tatiana Komarova

London School of Economics & Political Science (LSE)

Fabio Sanches

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Daniel Silva

City University London - Department of Economics

Sorawoot Srisuma

University of Surrey; National University of Singapore (NUS) - Department of Economics

Date Written: August 4, 2017

Abstract

Most empirical and theoretical econometric studies of dynamic discrete choice models assume the discount factor to be known. We show the knowledge of the discount factor is not necessary to identify parts, or all, of the payoff function. We show the discount factor can be generically identified jointly with the payoff parameters. It is known the payoff function cannot non-parametrically identified without any a priori restrictions. Our identification of the discount factor is robust to any normalization choice on the payoff parameters. In IO applications normalizations are usually made on switching costs, such as entry costs and scrap values. We also show that switching costs can be non-parametrically identified, in closed-form, independently of the discount factor and other parts of the payoff function. Our identification strategies are constructive. They lead to easy to compute estimands that are global solutions. We illustrate with a Monte Carlo study and the dataset from Ryan (2012).

Keywords: Discount Factor, Dynamic Discrete Choice Problem, Identification, Estimation, Switching Costs

JEL Classification: C14, C25, C51

Suggested Citation

Komarova, Tatiana and Sanches, Fabio and Silva, Daniel and Srisuma, Sorawoot, Joint Analysis of the Discount Factor and Payoff Parameters in Dynamic Discrete Choice Models (August 4, 2017). Available at SSRN: https://ssrn.com/abstract=3015575 or http://dx.doi.org/10.2139/ssrn.3015575

Tatiana Komarova

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 02078523707 (Phone)

HOME PAGE: http://personal.lse.ac.uk/komarova/

Fabio Sanches

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Daniel Silva

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Sorawoot Srisuma (Contact Author)

University of Surrey ( email )

School of Economics
Faculty of Business, Economics and Law
Guildford, Surrey GU2 5XH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/tangsrisuma/

National University of Singapore (NUS) - Department of Economics ( email )

21 Lower Kent Ridge Rd
Singapore, 119077
Malaysia

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