Did Harold Zuercher Have Time-Separable Preferences?

TL;DR

This paper develops an empirical model of dynamic discrete choice allowing for non-separable time preferences, improving data fit and revealing that Harold Zuercher's preferences are non-separable, which impacts inference and policy.

Contribution

It generalizes the Rust (1987) model to include non-separable time preferences, providing a new estimation method and applying it to real data to test preference structure.

Findings

The model fits the bus engine replacement data better.

Harold Zuercher's preferences are statistically non-separable.

Mis-specifying preferences as separable biases parameter estimates.

Abstract

This paper proposes an empirical model of dynamic discrete choice to allow for non-separable time preferences, generalizing the well-known Rust (1987) model. Under weak conditions, we show the existence of value functions and hence well-defined optimal choices. We construct a contraction mapping of the value function and propose an estimation method similar to Rust's nested fixed point algorithm. Finally, we apply the framework to the bus engine replacement data. We improve the fit of the data with our general model and reject the null hypothesis that Harold Zuercher has separable time preferences. Misspecifying an agent's preference as time-separable when it is not leads to biased inferences about structure parameters (such as the agent's risk attitudes) and misleading policy recommendations.