nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2009‒03‒22
seven papers chosen by
Philip Yu
Hong Kong University

  1. Dynamic binary outcome models with maximal heterogeneity By Martin Browning; Jesus M. Carro
  2. Essays on the econometric theory of rank regressions By Subbotin, Viktor
  3. Choice by Lexicographic Semiorders By Manzini, Paola; Mariotti, Marco
  4. Trip chaining: Who wins who loses? By André De Palma; Fay Dunkerley; Stef Proost
  5. Labour Incentive Reforms in Pre-Retirement Age in Austria By Narazani E; Shima I
  6. A Test of the Rational Expectations Hypothesis using data from a Natural Experiment By Anna Conte; Peter G. Moffatt; Fabrizio Botti; Daniela T. Di Cagno; Carlo D'Ippoliti
  7. A behavioral microsimulation model with discrete labour supply for Italian couples By Pacifico, Daniele

  1. By: Martin Browning; Jesus M. Carro
    Abstract: Most econometric schemes to allow for heterogeneity in micro behaviour have two drawbacks: they do not fit the data and they rule out interesting economic models. In this paper we consider the time homogeneous first order Markov (HFOM) model that allows for maximal heterogeneity. That is, the modelling of the heterogeneity does not impose anything on the data (except the HFOM assumption for each agent) and it allows for any theory model (that gives a HFOM process for an individual observable variable). `Maximal' means that the joint distribution of initial values and the transition probabilities is unrestricted. We establish necessary and sufficient conditions for the point identification of our heterogeneity structure and show how it depends on the length of the panel. A feasible ML estimation procedure is developed. Tests for a variety of subsidiary hypotheses such as the assumption that marginal dynamic effects are homogeneous are developed. We apply our techniques to a long panel of Danish workers who are very homogeneous in terms of observables. We show that individual unemployment dynamics are very heterogeneous, even for such a homogeneous group. We also show that the impact of cyclical variables on individual unemployment probabilities differs widely across workers. Some workers have unemployment dynamics that are independent of the cycle whereas others are highly sensitive to macro shocks.
    Keywords: Discrete choice, Markov processes, Nonparametric identification, Unemployment dynamics
    JEL: C23 C24 J64
    Date: 2009–02
  2. By: Subbotin, Viktor
    Abstract: Several semiparametric estimators recently developed in the econometrics literature are based on the rank correlation between the dependent and explanatory variables. Examples include the maximum rank correlation estimator (MRC) of Han [1987], the monotone rank estimator (MR) of Cavanagh and Sherman [1998], the pairwise-difference rank estimators (PDR) of Abrevaya [2003], and others. These estimators apply to various monotone semiparametric single-index models, such as the binary choice models, the censored regression models, the nonlinear regression models, and the transformation and duration models, among others, without imposing functional form restrictions on the unknown functions and distributions. This work provides several new results on the theory of rank-based estimators. In Chapter 2 we prove that the quantiles and the variances of their asymptotic distributions can be consistently estimated by the nonparametric bootstrap. In Chapter 3 we investigate the accuracy of inference based on the asymptotic normal and bootstrap approximations, and provide bounds on the associated error. In the case of MRC and MR, the bound is a function of the sample size of order close to n^(-1/6). The PDR estimators, however, belong to a special subclass of rank estimators for which the bound is vanishing with the rate close to n^(-1/2). In Chapter 4 we study the efficiency properties of rank estimators and propose weighted rank estimators that improve efficiency. We show that the optimally weighted MR attains the semiparametric efficiency bound in the nonlinear regression model and the binary choice model. Optimally weighted MRC has the asymptotic variance close to the semiparametric efficiency bound in single-index models under independence when the distribution of the errors is close to normal, and is consistent under practically relevant deviations from the single index assumption. Under moderate nonlinearities and nonsmoothness in the data, the efficiency gains from weighting are likely to be small for MRC in the transformation model and for MRC and MR in the binary choice model, and can be large for MRC and MR in the monotone regression model. Throughout, the theoretical results are illustrated with Monte-Carlo experiments and real data examples
    Keywords: Semiparametric models; Bootstrap; Maximum rank correlation estimator; Monotone rank estimator; Efficiency; U-processes; U-statistics; Maximal Inequalities; Econometric theory; Rank regressions
    JEL: C1 C2
    Date: 2008–12
  3. By: Manzini, Paola (University of London); Mariotti, Marco (Queen Mary, University of London)
    Abstract: We propose an extension of Tversky's lexicographic semiorder to a model of boundedly rational choice. We explore the connection with sequential rationalisability of choice, and we provide axiomatic characterisations of both models in terms of observable choice data.
    Keywords: lexicographic semiorders, bounded rationality, revealed preference, choice
    JEL: D0
    Date: 2009–02
  4. By: André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Fay Dunkerley (Center for Economic Studies - CES - KU Leuven - CES - KU Leuven); Stef Proost (Center for Economic Studies - CES - KU Leuven - CES - KU Leuven)
    Abstract: This paper studies how trip chaining (combining commuting and shopping or commuting and child care) affects market competition: in particular, pricing and the equilibrium number of firms as well as welfare. We use a monopolistic competition framework, where firms sell differentiated products as well as offering differentiated jobs to households, who are all located at some distance from the firms. The symmetric equilibria with and without the option of trip chaining are compared. We show analytically that introducing the trip chaining option reduces the profit margin of the firms in the short run, but increases welfare. The welfare gains are, however, smaller than the transport cost savings. In the free-entry long run equilibrium, the number of firms decreases but welfare is higher. A numerical illustration gives orders of magnitude of the different effects.
    Keywords: trip chaining ; discrete choice model ; imperfect competition ; wage and price competition
    Date: 2008–11
  5. By: Narazani E; Shima I
    Abstract: In view of the political debate on the future sustainability of pensions system in Austria and given the low participation of older worker in the labour market, in this paper we try to shed light on employment and retirement behaviour while a combination of reduction in pension benefits along with income support is provided. We find out that reforms characterized by moderately generous income support while working along with lower pension entitlement in early retirement yield higher social welfare compared to the current system. The labour supply response signals increase under the proposed reforms among middle-income males, in the age category 55-60, whereas these reforms seem to be ineffective for women. These findings emphasize the importance of introducing pension reforms complemented with tax-benefits policies such that the former remove the disincentives to retire earlier and the later enhance the employment of workers in pre-retirement age.
    Keywords: supply, discrete choice models, guaranteed minimum income, retirement, older worker
    Date: 2009–03–06
  6. By: Anna Conte (University of Westminster); Peter G. Moffatt (School of Economics, University of East Anglia); Fabrizio Botti (Department of Social, Economic, Actuarial and Demographic Studies, Sapienza University of Rome); Daniela T. Di Cagno (Department of Economic and Business Sciences, LUISS Guido Carli); Carlo D'Ippoliti (Department of Social, Economic, Actuarial and Demographic Studies, Sapienza University of Rome)
    Abstract: Data on contestantsÕ choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. The most important issue addressed in the paper is what belief function is actually being used by contestants. The parameters of this function are estimated freely along with the parameters of a choice model. Separate identification of the belief function and preferences is possible by virtue of the fact that at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the ÒtrueÓ offer function which is estimated using data on offers actually made to contestants. We find that there is a significant difference between these two functions, and hence we reject the rational expectations hypothesis. However, when a simpler Òrule-of-thumbÓ structure is assumed for the belief function, we find a correspondence to the function obtained from data on actual offers. Our overall conclusion is that contestants are rational to the extent that they make use of all available relevant information, but are not fully rational because they are not processing the information in an optimal way. The importance of belief-formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward-looking as opposed to myopic.
    Keywords: Beliefs, Discrete choice models, Method of simulated likelihood, Natural Experiments, rational expectations, risky choice
    JEL: C15 C23 C25 D81
    Date: 2009–01
  7. By: Pacifico, Daniele
    Abstract: The aim of this paper is to introduce labour supply behaviour in an arithmetic microsimulation model so as to take into account changes in labour supply when a new policy is evaluated. I explore the performance of a labour supply estimation method based on a discrete choice set. The idea behind this approach is to work directly with preferences instead of labour supply functions. The main advantage of the discrete approach is the possibility of dealing easily with non-convex budget sets and joint labour supply. This let the discrete approach relatively suitable for policy evaluation purposes. I use the papers from Blundell, Dancan, McCrae and Meghir (1999) and Brewer, Duncan Shepard and Suarez (2006) as main references for the structural microeconometric model. Several innovative elements are taken into account with respect previous Italian studies. In particular, I allow for errors in the predicted wage for non-workers, unobserved heterogeneity in preferences, unobserved monetary fixed costs of working and child-care demand. The model is fully parametric and the Simulated Maximum Likelihood approach is used to approximate multidimensional integrals. An overview of the STATA routine for the maximum likelihood estimation is also presented. The elasticities of labour supply for married men and women are computed and discussed.
    Keywords: Microsimulation; Household labour supply; discrete choice
    JEL: H31 J22 H24
    Date: 2009–03

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