Nested Pseudo likelihood estimation of continuous-time dynamic discrete games

We introduce a sequential estimator for continuous time dynamic discrete choice models (single-agent models and games) by adapting the nested pseudo likelihood (NPL) estimator of Aguirregabiria and Mira (2002, 2007), developed for discrete time models with discrete time data, to the continuous time case with data sampled either discretely (i.e., uniformly-spaced snapshot data) or continuously. We establish conditions for consistency and asymptotic normality of the estimator, a local convergence condition, and, for single agent models, a zero Jacobian property assuring local convergence. We carry out a series of Monte Carlo experiments using an entry-exit game with five heterogeneous firms to confirm the large-sample properties and demonstrate finite-sample bias reduction via iteration. In our simulations we show that the convergence issues documented for the NPL estimator in discrete time models are less likely to affect comparable continuous-time models. We also show that there can be large bias in economically-relevant parameters, such as the competitive effect and entry cost, from estimating a misspecified discrete time model when in fact the data generating process is a continuous time model.