IDEAS home Printed from
   My bibliography  Save this article

The endogenous grid method for discrete‐continuous dynamic choice models with (or without) taste shocks


  • Fedor Iskhakov
  • Thomas H. Jørgensen
  • John Rust
  • Bertel Schjerning


We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous grid‐point method (EGM) to discrete‐continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice‐specific independent and identically distributed extreme value taste shocks that are typically interpreted as “unobserved state variables” in structural econometric applications, or serve as “random noise” to smooth out kinks in the value functions in numerical applications. We present Monte Carlo experiments that demonstrate the reliability and efficiency of the DC‐EGM algorithm and the associated maximum likelihood estimator for structural estimation of a life‐cycle model of consumption with discrete retirement decisions.

Suggested Citation

  • Fedor Iskhakov & Thomas H. Jørgensen & John Rust & Bertel Schjerning, 2017. "The endogenous grid method for discrete‐continuous dynamic choice models with (or without) taste shocks," Quantitative Economics, Econometric Society, vol. 8(2), pages 317-365, July.
  • Handle: RePEc:wly:quante:v:8:y:2017:i:2:p:317-365

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Hintermaier, Thomas & Koeniger, Winfried, 2018. "Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission," Economics Working Paper Series 1806, University of St. Gallen, School of Economics and Political Science, revised Nov 2019.
    2. Bruneel-Zupanc, Christophe Alain, 2021. "Discrete-Continuous Dynamic Choice Models: Identification and Conditional Choice Probability Estimation," TSE Working Papers 21-1185, Toulouse School of Economics (TSE).
    3. Agnes Kovacs & Hamish Low & Patrick Moran, 2021. "Estimating Temptation And Commitment Over The Life Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 101-139, February.
    4. Busch, Christopher & Krueger, Dirk & Ludwig, Alexander & Popova, Irina & Iftikhar, Zainab, 2020. "Should Germany have built a new wall? Macroeconomic lessons from the 2015-18 refugee wave," Journal of Monetary Economics, Elsevier, vol. 113(C), pages 28-55.
    5. Adamopoulou, Effrosyni & Manaresi, Francesco & Rachedi, Omar & Yurdagul, Emircan, 2021. "Minimum Wages and Insurance within the Firm," IZA Discussion Papers 14943, Institute of Labor Economics (IZA).
    6. Iskhakov, Fedor & Keane, Michael, 2021. "Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia," Journal of Econometrics, Elsevier, vol. 223(2), pages 401-432.
    7. Kristensen, Dennis & Mogensen, Patrick K. & Moon, Jong Myun & Schjerning, Bertel, 2021. "Solving dynamic discrete choice models using smoothing and sieve methods," Journal of Econometrics, Elsevier, vol. 223(2), pages 328-360.
    8. Axel Anderson & Jeremy Rosen & John Rust & Kin-Ping Wong, 2021. "Disequilibrium Play in Tennis," Working Papers gueconwpa~21-21-07, Georgetown University, Department of Economics.
    9. Jang, Youngsoo & Lee, Soyoung, 2019. "A Generalized Endogenous Grid Method for Models with the Option to Default," MPRA Paper 95721, University Library of Munich, Germany.
    10. Maiko Koga & Kohei Matsumura, "undated". "Marginal Propensity to Consume and the Housing Choice," Bank of Japan Working Paper Series 20-E-3, Bank of Japan.
    11. Gaillard, Alexandre & Kankanamge, Sumudu, 2021. "Entrepreneurship and Labor Market Mobility: the Role of Unemployment Insurance," TSE Working Papers 21-1187, Toulouse School of Economics (TSE).
    12. Sebastian Galiani & Juan Pantano, 2021. "Structural Models: Inception and Frontier," NBER Working Papers 28698, National Bureau of Economic Research, Inc.
    13. Katrine Jakobsen & Thomas H Jørgensen & Hamish Low, 2022. "Fertility and Family Labor Supply," Economics Series Working Papers 965, University of Oxford, Department of Economics.
    14. Alexander Ludwig & Jochen Mankart & Jorge Quintana & Mirko Wiederholt & Nathanael Vellekoop, 2019. "House Price Expectations and Housing Choice," 2019 Meeting Papers 848, Society for Economic Dynamics.
    15. Barczyk, Daniel & Kredler, Matthias, 2021. "Blast from the past: The altruism model is richer than you think," Journal of Economic Theory, Elsevier, vol. 198(C).
    16. Maliar, Lilia & Maliar, Serguei, 2022. "Deep learning classification: Modeling discrete labor choice," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    17. Youngsoo Jang & Soyoung Lee, 2021. "A Generalized Endogenous Grid Method for Default Risk Models," Staff Working Papers 21-11, Bank of Canada.
    18. Claudio Daminato & Mario Padula, 2020. "The Life-Cycle Effects of Pension Reforms: A Structural Approach," CSEF Working Papers 585, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    19. Kankanamge, Sumudu & Gaillard, Alexandre, 2020. "Buying and Selling Entrepreneurial Assets," TSE Working Papers 20-1078, Toulouse School of Economics (TSE).
    20. Rory McGee, 2021. "Old Age Savings and House Price Shocks," University of Western Ontario, Departmental Research Report Series 20214, University of Western Ontario, Department of Economics.
    21. Beatriz González, 2020. "Macroeconomics, firm dynamics and IPOs," Working Papers 2030, Banco de España.
    22. Erosa, Andrés & Fuster, Luisa & Martinez, Tomás R., 2021. "Public financing with financial frictions and underground economy," UC3M Working papers. Economics 32495, Universidad Carlos III de Madrid. Departamento de Economía.
    23. Jeppe Druedahl, 2021. "A Guide on Solving Non-convex Consumption-Saving Models," Computational Economics, Springer;Society for Computational Economics, vol. 58(3), pages 747-775, October.
    24. Grey Gordon, 2019. "Efficient Computation with Taste Shocks," Working Paper 19-15, Federal Reserve Bank of Richmond.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:quante:v:8:y:2017:i:2:p:317-365. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.