Identification of Dynamic Discrete Choice Models with Hyperbolic Discounting Using a Terminating Action

CAEPR WORKING PAPER SERIES (2022-010)

45 Pages Posted: 14 Mar 2023

See all articles by Chao Wang

Chao Wang

Indiana University Bloomington - Department of Economics

Stefan Weiergraeber

Indiana University Bloomington - Department of Economics

Ruli Xiao

Indiana University Bloomington - Department of Economics

Date Written: June 2, 2022

Abstract

We study the identification of dynamic discrete choice models with hyperbolic discounting using a terminating action. We provide novel identification results for both sophisticated and naive agents’ discount factors and their utilities in a finite horizon framework under the assumption of a stationary flow utility. In contrast to existing identification strategies we do not require to observe the final period for the sophisticated agent. Moreover, we avoid normalizing the flow utility of a reference action for both the sophisticated and the naive agent. We propose two simple estimators and show that they perform well in simulations.

Keywords: hyperbolic discounting, dynamic discrete choice model, identification

JEL Classification: C61, C50, C25

Suggested Citation

Wang, Chao and Weiergraeber, Stefan and Xiao, Ruli, Identification of Dynamic Discrete Choice Models with Hyperbolic Discounting Using a Terminating Action (June 2, 2022). CAEPR WORKING PAPER SERIES (2022-010), Available at SSRN: https://ssrn.com/abstract=4126360 or http://dx.doi.org/10.2139/ssrn.4126360

Chao Wang (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Stefan Weiergraeber

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Ruli Xiao

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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