Dynamic Decisions Under Subjective Expectations: A Structural Analysis

CAEPR WORKING PAPER 2018-001

57 Pages Posted: 22 Feb 2018 Last revised: 20 Oct 2020

See all articles by Yonghong An

Yonghong An

Texas A&M University

Yingyao Hu

Johns Hopkins University - Department of Economics

Ruli Xiao

Indiana University; Indiana University

Date Written: April 9, 2020

Abstract

We study dynamic discrete choice models without assuming rational expectations. Agents' beliefs about state transitions are subjective, unknown, and may differ from their objective counterparts. We show that agents' preferences and subjective beliefs are identified in both finite and infinite horizon models. We estimate the model primitives via maximum likelihood estimation and demonstrate the good performance of the estimator by Monte Carlo experiments. Using the Panel Study of Income Dynamics (PSID) data, we illustrate our method in an analysis of women's labor participation. We find that workers do not hold rational expectations about income transitions.

Keywords: Dynamic discrete choice models, subjective expectations, rational expectations, nonparametric identiļ¬cation, estimation.

Suggested Citation

An, Yonghong and Hu, Yingyao and Xiao, Ruli and Xiao, Ruli, Dynamic Decisions Under Subjective Expectations: A Structural Analysis (April 9, 2020). CAEPR WORKING PAPER 2018-001, Available at SSRN: https://ssrn.com/abstract=3122701 or http://dx.doi.org/10.2139/ssrn.3122701

Yonghong An (Contact Author)

Texas A&M University ( email )

3051 Allen Building
4428 TAMU
College Station, TX Texas 77843
United States

Yingyao Hu

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Ruli Xiao

Indiana University ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Indiana University ( email )

100 S Woodlawn Ave
Bloomington, IN 47405
United States

HOME PAGE: http://https://sites.google.com/site/iueconomicsrulixiao/

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