Dynamic and Stochastic Rational Behavior
Abstract
The (static) utility maximization model of Afriat (1967), which is the standard in analysing choice behavior, is under scrutiny. We propose the Dynamic Random Utility Model (DRUM) that is more flexible than the framework of Afriat (1967) and more informative than the static Random Utility Model (RUM) framework of McFadden and Richter (1990). Under DRUM, each decision-maker randomly draws a utility function in each period and maximizes it subject to a menu. DRUM allows for unrestricted time correlation and cross-section heterogeneity in preferences. We characterize DRUM for situations when panel data on choices and menus are available. DRUM is linked to a finite mixture of deterministic behaviors that can be represented as a product of static rationalizable behaviors. This link allows us to convert the characterizations of the static RUM to its dynamic form. In an application, we find that although the static utility maximization model fails to explain population behavior, DRUM can explain it.
Cite
@article{arxiv.2302.04417,
title = {Dynamic and Stochastic Rational Behavior},
author = {Nail Kashaev and Victor H. Aguiar and Martin Plávala and Charles Gauthier},
journal= {arXiv preprint arXiv:2302.04417},
year = {2023}
}
Comments
arXiv admin note: text overlap with arXiv:2204.07220