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Department of Economics, Umeň University Umeň Economic Studies, Department of Economics, Umeň University

No 951:
An empirical model of the decision to switch between electricity price contracts

Gauthier Lanot () and Mattias Vesterberg ()

Abstract: We present a novel model for a time series of individual binary decisions which depends on the history of prices. The model is based on the Bayesian learning procedure which is at the core of sequential decision making.

We show that the model capture dependence on past events and past priors in a straightforward fashion, the model capture some dependence on initial condition, here in the form of the prior at the start of the decision period, and that estimation through maximum likelihood is straightforward.

We estimate the parameters of the model on a sample of Swedish households who have to decide over time between competing electricity contracts. The estimated parameters suggest that households respond to prices by switching between contracts, and that the response can be rather substantial for alternative price processes

Keywords: Price; Contract Choice; Bayesian Learning; Time Series; Binary Decision; Survival analysis; (follow links to similar papers)

JEL-Codes: C11; C41; D12; Q41; (follow links to similar papers)

36 pages, June 21, 2017

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