Dynamic Random Utility

Mira Frick (), Ryota Iijima () and Tomasz Strzalecki
Additional contact information
Mira Frick: Cowles Foundation, Yale University
Ryota Iijima: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/ryota-iijima

No 2092R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We provide an axiomatic analysis of dynamic random utility, characterizing the stochastic choice behavior of agents who solve dynamic decision problems by maximizing some stochastic process (U_t) of utilities. We show "rst that even when (U_t) is arbitrary, dynamic random utility imposes new testable restrictions on how behavior across periods is related, over and above period-by-period analogs of the static random utility axioms: An important feature of dynamic random utility is that behavior may appear history dependent, because past choices reveal information about agents� past utilities and (U_t) may be serially correlated; however, our key new axioms highlight that the model entails speci"c limits on the form of history dependence that can arise. Second, we show that when agents� choices today influence their menu tomorrow (e.g., in consumption-savings or stopping problems), imposing natural Bayesian rationality axioms restricts the form of randomness that (U_t) can display. By contrast, a speci"cation of utility shocks that is widely used in empirical work violates these restrictions, leading to behavior that may display a negative option value and can produce biased parameter estimates. Finally, dynamic stochastic choice data allows us to characterize important special cases of random utility�in particular, learning and taste persistence�that on static domains are indistinguishable from the general model.

Keywords: Dynamic stochastic choice; Random utility; History dependence; Serially correlated utilities; Consumption persistence; Learning (search for similar items in EconPapers)
JEL-codes: D81 D83 D90 (search for similar items in EconPapers)
Pages: 101 pages
Date: 2017-06, Revised 2018-11
New Economics Papers: this item is included in nep-mic and nep-upt
Note: Includes Supplimental Material
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Related works:
Journal Article: Dynamic Random Utility (2019)
Working Paper: Dynamic Random Utility (2017)
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