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A New Model for Interdependent Durations

De Paula, A; Honore, B; (2018) A New Model for Interdependent Durations. Quantitative Economics , 9 (3) pp. 1299-1333. 10.3982/QE439. Green open access

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Abstract

This paper introduces a bivariate version of the generalized accelerated failure time model. It allows for simultaneity in the econometric sense that the two realized outcomes depend structurally on each other. Another feature of the proposed model is that it will generate equal durations with positive probability. Our approach takes a stylized economic model that leads to a univariate generalized accelerated failure time model as a starting point. In this model, agents decide when to transition from an initial state to a new one, and the covariates influence the difference in the utility flow in the two states. We introduce simultaneity by allowing the utility flow to depend on the status of the other person. The econometric model is then completed by assuming that the observed outcome is the Nash bargaining solution in that simple economic model. The advantage of this approach is that it includes independent realizations from the generalized accelerated failure time model as a special case, and deviations from this special case can be given an economic interpretation. We established identification under assumptions that are similar to those in the literature on nonparametric estimation of duration models. We illustrate the model by studying the joint retirement decisions in married couples using the Health and Retirement Study. In that example, it seems reasonable to allow for the possibility that each partner’s optimal retirement time depends on the retirement time of the spouse. Moreover, the data suggest that the wife and the husband retire at the same time for a nonnegligible fraction of couples. The main empirical finding is that the simultaneity is economically important. In our preferred specification, the indirect utility associated with being retired increases by approximately 5% when one’s spouse retires.

Type: Article
Title: A New Model for Interdependent Durations
Open access status: An open access version is available from UCL Discovery
DOI: 10.3982/QE439
Publisher version: https://doi.org/10.3982/QE439
Language: English
Additional information: Copyright © 2018 The Authors. Licensed under the Creative Commons Attribution-NonCommercial License 4.0. Available at http://qeconomics.org. https://doi.org/10.3982/QE439
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/10033875
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