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Imputing Individual Effects in Dynamic Microsimulation Models.An application of the Rank Method

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  • Ambra Poggi
  • Matteo G. Richiardi

Abstract

Dynamic microsimulation modeling involves two stages: estimation and forecasting. Unobserved heterogeneity is often considered in estimation, but not in forecasting, beyond trivial cases. Non-trivial cases involve individuals that enter the simulation with a history of previous outcomes. We show that the simple solutions of attributing to these individuals a null effect or a random draw from the estimated unconditional distributions lead to biased forecasts, which are often worse than those obtained neglecting unobserved heterogeneity altogether. We then present a first implementation of the Rank method, a new algorithm for attributing the individual effects to the simulation sample which greatly simplifies those already known in the literature. Out-of-sample validation of our model shows that correctly imputing unobserved heterogeneity significantly improves the quality of the forecasts.

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Paper provided by LABORatorio R. Revelli, Centre for Employment Studies in its series LABORatorio R. Revelli Working Papers Series with number 124.

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Date of creation: 2012
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Handle: RePEc:cca:wplabo:124

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Keywords: Dynamic microsimulation; Unobserved heterogeneity; Validation; Rank method; Assignment algorithms; Female labor force participation; Italy;

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