Health, Children, and Elderly Living Arrangements: A Multiperiod-Multinomial Probit Model with Unobserved Heterogeneity and Autocorrelated Errors [report]

Axel Borsch-Supan, Vassilis Hajivassiliou, Laurence Kotlikoff, John Morris
1990 unpublished
Decisions by the elderly regarding their living arrangements (e.g., living alone, living with children, or living in a nursing home) seem best modeled as a discrete choice problem in which the elderly view certain choices as closer substitutes than others. For example, living with children may more closely substitute for living independently than living in an institution does. Unobserved determinants of living arrangements at a point in time are, therefore, quite likely to be correlated. In the
more » ... correlated. In the parlance of discrete choice models, this means that the assumption of the independence of irrelevant alternatives (IIA) will be violated. Indeed, a number of recent studies of living arrangements of the elderly document the violation of HA. ' In addition to relaxing the IIA assumption of no intratemporal correlation between unobserved determinants of competing living arrangements, one should also relax the assumption of no intertemporal correlation of such determinants. The assumption of no intertemporal correlation underlies most studies of living arrangements, particularly those estimated with cross-sectional data. While cross-sectional variation in household characteristics can provide important insights into the determinants of living arrangements, the living arrangement decision is clearly an intertemporal choice and a potentially com-
doi:10.3386/w3343 fatcat:hpdpnne2crhatcf35mqbd5hin4