This paper oﬀers a new identiﬁcation strategy for disentangling structural state dependence from unobserved heterogeneity in preferences. Our strategy exploits market environments where there is a choice-consumption mismatch. We ﬁrst demonstrate the eﬀectiveness of our identiﬁcation strategy in obtaining unbiased state dependence estimates via Monte Carlo analysis and highlight its superiority relative to the extant choice-set variation based approach. In an empirical application that uses data of repeat transactions from the car rental industry, we ﬁnd evidence of structural state dependence, but show that state dependence eﬀects may be overstated without exploiting the choice-consumption mismatches that materialize through free upgrades.
Sudhir, K. and Yang, Nathan, "Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity" (2014). Cowles Foundation Discussion Papers. 2340.