A Simple and Robust Estimator for Discount Factors in Optimal Stopping Dynamic Discrete Choice Models

23 Pages Posted: 20 Sep 2019

See all articles by Øystein Daljord

Øystein Daljord

University of Chicago, Booth School of Business

Denis Nekipelov

University of California, Berkeley

Minjung Park

Ewha Womans University

Date Written: September 19, 2019

Abstract

We propose a simple and robust two-step estimator for discount factors in a class of dynamic discrete choice models. The estimator follows from constructive identification results, including a new identification result for a general, time separable discount function. The estimator is derived as the solution to well-behaved sample moment conditions which are linear in the discount factors and are independent of the utility function. The estimator is therefore easy to implement, computationally light, and in contrast to existing estimators, robust to biases from finite sample approximations to the unknown utility function. We apply the estimator to data on mortgage defaults under an identifying assumption of time homogeneity of the utility function. We compare the performance of the proposed estimator to alternative two-step estimators that jointly estimate the discount factor and the utility function. The results show that our proposed estimator's robustness to finite sample approximation bias and its computational ease do not necessarily come at a material expense of precision.

Keywords: time preferences, dynamic discrete choice models, optimal stopping problems, general discount function

JEL Classification: C14, C50, M30

Suggested Citation

Daljord, Øystein and Nekipelov, Denis and Park, Minjung, A Simple and Robust Estimator for Discount Factors in Optimal Stopping Dynamic Discrete Choice Models (September 19, 2019). Chicago Booth Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3456840 or http://dx.doi.org/10.2139/ssrn.3456840

Øystein Daljord (Contact Author)

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

Denis Nekipelov

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Minjung Park

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750, Seoul Seoul 120
Korea, Republic of (South Korea)

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