Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

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

Gauthier Lanot () and Mattias Vesterberg ()
Additional contact information
Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Mattias Vesterberg: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

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

JEL-codes: C11; C41; D12; Q41

36 pages, June 21, 2017

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