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Yi Xin, Assistant Professor of Economics, Caltech
Does Harold Zurcher Have Time-Separable Preferences?
Abstract: We propose an empirical model of dynamic discrete choices with Epstein-Zin preferences, generalizing the well-known Rust model. Based on the Bellman equation with Epstein-Zin preferences, we show the existence of the value functions. In particular, we obtain a weak condition under which the largest and the smallest value functions exist. Moreover, we show that the value function is unique when the agent prefers late resolution of uncertainty. We construct a contraction mapping of the value function and propose an estimation method similar to Rust’s nested fixed point algorithm. We apply the framework to the bus engine replacement data. Based on our estimates, we can reject the null hypothesis that Harold Zuercher has separable time preferences.
Email lprincio@arizona.edu for a copy of the paper.