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Using Subjective Expectations Data to Allow for Unobserved Heterogeneity in Hotz-Miller Estimation Strategies

Author

Listed:
  • Yu Zheng

    (City University of Hong Kong)

  • Juan Pantano

    (Washington University in St. Louis)

Abstract
We introduce a novel approach to allow for unobserved heterogeneity in two-step structural estimation strategies for discrete choice dynamic programming models (i.e strategies that avoid full solution methods). We contribute to the literature by adopting a fiÂ…xed effects approach: rather than identifying an unobserved heterogeneity distribution, we actually reveal the true unobserved type of each observation in a first step. We do so by exploiting the tight link between the conditional choice probabilities that are derived from the economic model and just two subjective self-reported assessments about future choice probabilities such as those commonly elicited in major surveys. We uncover the unusual power of ideal expectations data to identify unobserved types for different classes of models. Of more empirical relevance, we show that our results hold when we allow these subjective future choice probabilities to be elicited in less than ideal circumstances, such as, for example, when self-reports display substantial "heaping" at "focal" reference values.

Suggested Citation

  • Yu Zheng & Juan Pantano, 2012. "Using Subjective Expectations Data to Allow for Unobserved Heterogeneity in Hotz-Miller Estimation Strategies," 2012 Meeting Papers 940, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:940
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    4. Pamela Giustinelli, 2016. "Group Decision Making With Uncertain Outcomes: Unpacking Child–Parent Choice Of The High School Track," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(2), pages 573-602, May.
    5. de Bresser, Jochem, 2021. "Evaluating the Accuracy of Counterfactuals The Role of Heterogeneous Expectations in Life Cycle Models," Discussion Paper 2021-034, Tilburg University, Center for Economic Research.
    6. Sebastian Galiani & Juan Pantano, 2021. "Structural Models: Inception and Frontier," NBER Working Papers 28698, National Bureau of Economic Research, Inc.
    7. de Bresser, Jochem, 2021. "Evaluating the Accuracy of Counterfactuals The Role of Heterogeneous Expectations in Life Cycle Models," Other publications TiSEM a7e2b4d8-fed0-4e86-926f-d, Tilburg University, School of Economics and Management.

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