In Short:

We propose a discrete choice model with unobserved heterogeneity in consideration sets and in standard risk aversion.

Abstract

This paper is concerned with learning decision-makers’ preferences using data on observed choices from a finite set of risky alternatives. We propose a discrete choice model with unobserved heterogeneity in consideration sets and in standard risk aversion. We obtain sufficient conditions for the model’s semi-nonparametric point identification, including in cases where consideration depends on preferences and on some of the exogenous variables. Our method yields an estimator that is easy to compute and is applicable in markets with large choice sets. We illustrate its properties using a dataset on property insurance purchases.

About the author

Levon Barseghyan

professor, school of government and policy

Levon Barseghyan’s work, both theoretical and empirical, is aimed at uncovering mechanisms that shape economic behavior and how such behavior is affected by market structure, economic policies and political institutions.

Francesca Molinari

professor, school of government and policy

Francesca Molinari is a leading authority in econometric theory and applied econometrics.