Identifying the Discount Factor in Dynamic Discrete Choice Models

39 Pages Posted: 11 Oct 2017 Last revised: 23 May 2019

See all articles by Jaap H. Abbring

Jaap H. Abbring

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Tinbergen Institute; IZA Institute of Labor Economics

Øystein Daljord

University of Chicago, Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

Empirical research often cites observed choice responses to variation that shifts expected discounted future utilities, but not current utilities, as an intuitive source of information on time preferences. We study the identification of dynamic discrete choice models under such economically motivated exclusion restrictions on primitive utilities. We show that each exclusion restriction leads to an easily interpretable moment condition with the discount factor as the only unknown parameter. The identified set of discount factors that solves this condition is finite, but not necessarily a singleton. Consequently, in contrast to common intuition, an exclusion restriction does not in general give point identification. Finally, we show that exclusion restrictions have nontrivial empirical content: The implied moment conditions impose restrictions on choices that are absent from the unconstrained model.

Keywords: discount factor, dynamic discrete choice, empirical content, identi cation

JEL Classification: C25, C61

Suggested Citation

Abbring, Jaap H. and Daljord, Øystein, Identifying the Discount Factor in Dynamic Discrete Choice Models (May 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2017-17, Available at SSRN: https://ssrn.com/abstract=3051326 or http://dx.doi.org/10.2139/ssrn.3051326

Jaap H. Abbring (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Øystein Daljord

University of Chicago, Booth School of Business ( email )

Chicago, IL 60637
United States
7738342146 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/oystein.daljord/index.html

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