Intertemporal Aggregation of Choice Data with Consumption Dependent Preferences

TL;DR

This paper examines how consumption-dependent preferences cause misspecification in random utility models, leading to biased estimators and violations of axioms, and characterizes the extent of this misspecification.

Contribution

It provides a precise characterization of the conditions and degree of misspecification in random utility models with consumption-dependent preferences.

Findings

Random utility models are misspecified under consumption dependence.

Misspecification causes biased estimators and axiom failures.

The paper quantifies the extent of misspecification.

Abstract

We study consumption dependence in the context of random utility and repeated choice. We show that, in the presence of consumption dependence, the random utility model is a misspecified model of repeated rational choice. This misspecification leads to biased estimators and failures of standard random utility axioms. We characterize exactly when and by how much the random utility model is misspecified when utilities are consumption dependent.