Consumption Dependent Random Utility

TL;DR

This paper introduces a dynamic random utility model incorporating consumption dependence, providing axiomatic analysis, a new revealed preference test, and computational advantages over existing methods.

Contribution

It develops a novel axiomatic framework and a practical revealed preference test for consumption-dependent utility, distinguishing it from state dependence.

Findings

The model can differentiate consumption dependence from state dependence.

The proposed test is computationally more efficient than previous methods.

Empirical application demonstrates the test's practicality with real data.

Abstract

We study a dynamic random utility model that allows for consumption dependence. We axiomatically analyze this model and find insights that allow us to distinguish between behavior that arises due to consumption dependence and behavior that arises due to state dependence. As part of our analysis, we show that it is impossible to distinguish between myopic and dynamically sophisticated agents when there are well defined marginal choices in each period. Building on our axiomatic analysis, we develop a revealed preference test for consumption dependent random utility. Our test can be implemented with real data, and we show that our test offers computational improvements over the natural extension of Kitamura and Stoye (2018) to our environment.