Working Paper: CEPR ID: DP16404
Authors: Fernando Alvarez; Katarna Borovikov; Robert Shimer
Abstract: We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones.
Keywords: baseline hazard; unobserved heterogeneity; mixed proportional hazard; GMM; sticky prices; nominal rigidities
JEL Codes: E31; E50; C14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| estimated baseline hazard rate (C41) | decrease in Kaplan-Meier hazard (C41) |
| unobserved heterogeneity (C21) | decrease in Kaplan-Meier hazard (C41) |
| heterogeneous firms' price-setting decisions (L11) | price level following monetary policy shock (E39) |
| MPH structure (C69) | describes regular price changes more accurately than temporary ones (E30) |