Did Harold Zuercher Have Time-Separable Preferences?

Jay Lu, Yao Luo, Kota Saito and Yi Xin

Papers from arXiv.org

Abstract: This paper proposes an empirical model of dynamic discrete choice to allow for non-separable time preferences, generalizing the well-known Rust (1987) model. Under weak conditions, we show the existence of value functions and hence well-defined optimal choices. We construct a contraction mapping of the value function and propose an estimation method similar to Rust's nested fixed point algorithm. Finally, we apply the framework to the bus engine replacement data. We improve the fit of the data with our general model and reject the null hypothesis that Harold Zuercher has separable time preferences. Misspecifying an agent's preference as time-separable when it is not leads to biased inferences about structure parameters (such as the agent's risk attitudes) and misleading policy recommendations.

Date: 2024-06
New Economics Papers: this item is included in nep-dcm and nep-ecm
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