Which Models Can We Trust to Evaluate Consumer Decision Making? Comment on “Choice Inconsistencies among the Elderly”

Jonathan Ketcham, Nicolai Kuminoff and Christopher A. Powers

No 21387, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Neoclassical and psychological models of consumer behavior often make divergent predictions for the welfare effects of paternalistic policies, leaving wide scope for researchers’ choice of a model to influence their policy conclusions. We develop a framework to reduce this model uncertainty and apply it to administrative data on consumer decision making in Medicare Part D. Consumers’ choices for prescription drug insurance plans can be explained by Abaluck and Gruber’s (AER 2011) model of utility maximization with psychological biases or by a neoclassical version of their model that precludes such biases. We evaluate these competing hypotheses using nonparametric tests of utility maximization and a trio of model validation tests. We find that 79% of enrollment decisions in Medicare Part D from 2006-2010 satisfied basic axioms of consumer preference theory under the assumptions of full information, zero transaction cost, and no measurement error. The validation tests provide evidence against widespread psychological biases. In particular, we find that precluding psychological biases improves the structural model’s out-of-sample predictions for consumer behavior.

JEL-codes: D12 I11 I38 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-age and nep-upt
Note: AG EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Ketcham, Jonathan, Nicolai V. Kuminoff, and Christopher A. Powers. 2016. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program: Comment." American Economic Review. 106(12): 3932-3961.

Downloads: (external link)
http://www.nber.org/papers/w21387.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:21387

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w21387

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().