Martin Pesendorfer (LSE)

"Reference dependence, limited attention, and intertemporal substitution in consumer choice"

29 May 2018, 12:00 pm

Abstract

We develop a discrete-choice demand model accommodating expectations-based reference effects following Koszegi and Rabin [2006]. Applying this model to panel data on household ketchup purchases, we find substantial evidence of reference effects. We then extend this model to fully dynamic setting accommodating limited attention and forward-looking search, finding robust evidence of estimated reference effects within this substantially richer setting. Using these estimates to explore the interaction between reference effects, forward-looking search, and dynamic purchasing, we find that allowing for reference effects substantially magnifies estimated differences between short- and long-run price responses.