How Do Behavioral Assumptions Affect Structural Inference? Evidence From A Laboratory Experiment

We use a laboratory experiment to investigate the effect that assuming rational expectations has on structural inference in a dynamic discrete choice decision problem. Our experimental design induces preferences up to each subject’s subjective rates of time preference, leaving unrestricted only this parameter and the decision rule that the subject uses in solving the problem. We analyze the data under the assumption that all subjects use the rational expectations decision rule, and also under weaker behavioral assumptions that allow for heterogeneity in the way people form decisions. We find no evidence that assuming rational expectations distorts inferences about the cross-sectional distribution of discount rates.