| Time preference and heuristics in a price search experiment (2007) | |||||||||||||||||
Abstract | |||||||||||||||||
| The last half of the 20 th century saw the emergence of a large literature that documents apparently “irrational” behavior in economics and psychology experiments. This has led to criticisms of economic methodology, particularly of structural econometric models that rely on the assumption of rational expectations. However, there has been almost no evidence provided as to whether, as a practical matter, assuming rational expectations generates misleading inference in structural econometric models. In this paper, we investigate the effect of the rational expectations assumption on inference about a single structural parameter using data from a laboratory price search experiment. Our novel experimental design induces preferences up to the subjective rate of time preference, leaving unrestricted only this parameter and the heuristics that subjects use in solving the search task. We analyze the experimental data under both rational expectations and weaker behavioral assumptions. The rational expectations assumption fits the data reasonably well, but the fit provided by simpler reservation price rules is better. Nevertheless, the two specifications provide consistent inferences about the central tendency of the population’s discount rate distribution. Differences in inference appear only at higher moments and at | |||||||||||||||||
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