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Another Look at the Identification of Dynamic Discrete Decision Processes

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Author Info
Victor Aguirregabiria (Boston University)

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Abstract

This paper presents an econometric approach to estimate the behavioral effects of counterfactual policy experiments in the context of dynamic decision models where the current utility function and the distribution of unobservables are nonparametrically specified. Previous studies have shown that the identification of the current utility function in dynamic decision models requires of stronger assumptions than in static decision models. We show in this paper that knowledge of the current utility function (or of a 'normalized' utility function) is not necessary to identify counterfactual choice probabilities in dynamic models. To identify these counterfactuals we need the probability distribution of the unobservables and the difference between the present value of choosing always the same alternative and the present value of deviating one period from this strategy. We show that both functions are identified from the factual choice probabilities under similar conditions as in static decision models. Based on this result we propose a nonparametric procedure to estimate the behavioral effects of counterfactual experiments in dynamic decision models. We apply this method to evaluate the effects of an investment subsidy program in the context of a model of machine replacement.

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Paper provided by EconWPA in its series Econometrics with number 0504006.

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Length: 41 pages
Date of creation: 19 Apr 2005
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Handle: RePEc:wpa:wuwpem:0504006

Note: Type of Document - pdf; pages: 41
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Related research
Keywords: Dynamic discrete decision processes; Nonparametric Identification; Counterfactual experiments.;

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Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hiroyuki Kasahara & Katsumi Shimotsu, 2006. "Nonparametric Identification and Estimation of Finite Mixture Models of Dynamic Discrete Choices," UWO Department of Economics Working Papers 20065, University of Western Ontario, Department of Economics. [Downloadable!]
    Other versions:
  2. Pedro Mira & Victor Aguirregabiria, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers wp2007_0711, CEMFI. [Downloadable!]
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