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The Dynamic Properties of Economic Preferences

Author

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  • Nicolás Salamanca

    (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)

Abstract

The time-stability of preferences is a crucial and ubiquitous assumption in economics, yet to date there is no method to test its validity. Based on a model of the dynamics of individual preferences, I develop a simple method to test this assumption. Time-persistance in preferences is captured via an autoregressive parameter that accounts for observable characteristics and is unattenuated by measurement error, which forms the basis of the test. The method also estimates the variance of persistent shocks to latent preferences, which measures unobserved heterogeneity, and preference measurement error. I illustrate the use of this method by testing the stability of risk aversion and patience using micro-level data, and find that patience is time-stable but risk aversion is not. However, change very slowly over time. This method provides researchers with a simple tool to properly test the assumption on preference stability, and to measure the degree of preference changes due to observable and unobservable factors.

Suggested Citation

  • Nicolás Salamanca, 2018. "The Dynamic Properties of Economic Preferences," Melbourne Institute Working Paper Series wp2018n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2018n04
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    File URL: https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0006/2749110/wp2018n04.pdf
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    Citations

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    Cited by:

    1. Armando N. Meier, 2019. "Emotions, Risk Attitudes, and Patience," SOEPpapers on Multidisciplinary Panel Data Research 1041, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Garbinti, Bertrand & Georges-Kot, Simon, 2019. "On the retirement effect of inheritance: heterogeneity and the role of risk aversion," Working Paper Series 2222, European Central Bank.
    3. Kettlewell, Nathan, 2019. "Risk preference dynamics around life events," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 66-84.

    More about this item

    Keywords

    stability of preferences; risk aversion; patience; shock persistence; measurement error;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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