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Discrete choice under risk with limited consideration

Levon Barseghyan (), Francesca Molinari and Matthew Thirkettle
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Matthew Thirkettle: Institute for Fiscal Studies

No CWP08/19, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: This paper is concerned with learning decision makers' (DMs) preferences using data on observed choices from a fi nite set of risky alternatives with monetary outcomes. We propose a discrete choice model with unobserved heterogeneity in consideration sets (the collection of alternatives considered by DMs) and unobserved heterogeneity in standard risk aversion. In this framework, stochastic choice is driven both by different rankings of alternatives induced by unobserved heterogeneity in risk preferences and by different sets of alternatives considered. We obtain sufficient conditions for seminonparametric point identi fication of both the distribution of unobserved heterogeneity in preferences and the distribution of consideration sets. Our method yields an estimator that is easy to compute and that can be used in markets with a large number of alternatives. We apply our method to a dataset on property insurance purchases. We fi nd that although households are on average strongly risk averse, they consider lower coverages more frequently than higher coverages. Finally, we estimate the monetary losses associated with limited consideration in our application.

Keywords: discrete choice; limited consideration; semi-nonparametric identifi cation (search for similar items in EconPapers)
Date: 2019-02-18
New Economics Papers: this item is included in nep-dcm and nep-upt
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Working Paper: Discrete Choice under Risk with Limited Consideration (2020) Downloads
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