Sequential Estimation Of Dynamic Discrete Games

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Sequential Estimation Of Dynamic Discrete Games

Author Info

Victor Aguirregabiria ()
Pedro Mira () (CEMFI, Centro de Estudios Monetarios y Financieros)

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Victor Aguirregabiria

Abstract

This paper studies the estimation of dynamic discrete games of incomplete information. Two main econometric issues appear in the estimation of these models: the indeterminacy problem associated with the existence of multiple equilibria, and the computational burden in the solution of the game. We propose a class of pseudo maximum likelihood (PML) estimators that deals with these problems and we study the asymptotic and finite sample properties of several estimators in this class. We first focus on two-step PML estimators which, though attractive for their computational simplicity, have some important limitations: They are seriously biased in small samples; they require consistent nonparametric estimators of players’ choice probabilities in the first step, which are not always feasible for some models and data; and they are asymptotically inefficient. Second, we show that a recursive extension of the two-step PML, which we call nested pseudo likelihood (NPL), addresses those drawbacks at a relatively small additional computational cost. The NPL estimator is particularly useful in applications where consistent nonparametric estimates of choice probabilities are either not available or very imprecise, e.g., models with permanent unobserved heterogeneity. Finally, we illustrate these methods in Montecarlo experiments and in an empirical application to a model of firm entry and exit in oligopoly markets using Chilean data from several retail industries.

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Paper provided by CEMFI in its series Working Papers with number wp2004_0413.

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Date of creation: Sep 2004
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Handle: RePEc:cmf:wpaper:wp2004_0413

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Article
- Victor Aguirregabiria & Pedro Mira, 2007. "Sequential Estimation of Dynamic Discrete Games," Econometrica, Econometric Society, vol. 75(1), pages 1-53, 01. [Downloadable!] (restricted)
Paper
- Victor Aguirregabiria & Pedro Mira, 2004. "Sequential Estimation of Dynamic Discrete Games," Industrial Organization 0406006, EconWPA. [Downloadable!]

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-10-18 (All new papers)
NEP-DCM-2004-10-18 (Discrete Choice Models)
NEP-ECM-2004-10-18 (Econometrics)
NEP-ENT-2004-10-18 (Entrepreneurship)

References listed on IDEAS
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Other versions:
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