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Dynamic Choice, Multistate Duration Models and Stochastic Structure

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An important problem in the analysis of intertemporal choice processes is how to justify the choice of mathematical structure of the transition probabilities. A related and delicate identification problem is to separate the effect of unobserved variables from the influence on preferences from past choice behavior (state dependence). The present paper proposes a particular behavioral assumption to characterize the stochastic structure of intertemporal discrete choice models under the absence of state dependence. This assumption extends Luce axiom; "Independence from Irrelevant Alternatives", to the intertemporal context. Under specific regularity conditions the implication of these assumptions is that the individual choice process is a Markov chain with a particularly simple structure of the transition probabilities. By drawing on results obtained by Dagsvik (1983, 1988) it is demonstrated that this structure is consistent with an intertemporal and life cycle consistent random utility model where the utilities are independent extremal processes in time. Finally, the framework is extended to allow for state dependence and time varying choice sets.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 172.

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Date of creation: Apr 1996
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Handle: RePEc:ssb:dispap:172

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Keywords: Life cycle consistent discrete choice; taste persistence; state dependence; Markovian choice processes; extremal processes; random utility processes; independence from irrelevant alternatives.;

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  1. Olsen, Randall J & Smith, D Alton & Farkas, George, 1986. "Structural and Reduced-Form Models of Choice among Alternatives in Continuous Time: Youth Employment under a Guaranteed Jobs Program," Econometrica, Econometric Society, vol. 54(2), pages 375-94, March.
  2. P O Lindberg & E A Eriksson & L-G Mattsson, 1995. "Invariance of achieved utility in random utility models," Environment and Planning A, Pion Ltd, London, vol. 27(1), pages 121-142, January.
  3. Dagsvik, J.K., 1995. "The Structure of Intertemporal Models for Myopic Discrete Choice with Random Preferences," Memorandum 11/1995, Oslo University, Department of Economics.
  4. Heckman, James J, 1991. "Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity," American Economic Review, American Economic Association, vol. 81(2), pages 75-79, May.
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