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Structural Models for Policy-Making: Coping with Parametric Uncertainty

Author

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  • Philipp Eisenhauer

    (University of Bonn)

  • Janos Gabler

    (University of Bonn and IZA)

  • Lena Janys

    (University of Bonn)

Abstract

The ex-ante evaluation of policies using structural econometric models is based on estimated parameters as a stand-in for the truth. This practice ignores uncertainty in the counterfactual policy predictions of the model. We develop a generic approach that deals with parametric uncertainty using uncertainty sets and frames model-informed policymaking as a decision problem under uncertainty. The seminal human capital investment model by Keane and Wolpin (1997) provides us with a well-known, influential, and empirically-grounded test case. We document considerable uncertainty in their policy predictions and highlight the resulting policy recommendations from using different formal rules on decision-making under uncertainty.

Suggested Citation

  • Philipp Eisenhauer & Janos Gabler & Lena Janys, 2021. "Structural Models for Policy-Making: Coping with Parametric Uncertainty," ECONtribute Discussion Papers Series 082, University of Bonn and University of Cologne, Germany.
  • Handle: RePEc:ajk:ajkdps:082
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    References listed on IDEAS

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