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A Semiparametric Estimator for Dynamic Optimization Models


  • Han Hong
  • Matthew Shum


We develop a new estimation methodology for dynamic optimization models with unobserved state variables Our approach is semiparametric in the sense of not requiring explicit parametric assumptions to be made concerning the distribution of these unobserved state variables We propose a two-step pairwise-difference estimator which exploits two common features of dynamic optimization problems: (1) the weak monotonicity of the agent's decision (policy) function in the unobserved state variables conditional on the observed state variables; and (2) the state-contingent nature of optimal decision-making which implies that conditional on the observed state variables the variation in observed choices across agents must be due to randomness in the unobserved state variables across agents We apply our estimator to a model of dynamic competitive equilibrium in the market for milk production quota in Ontario Canada

Suggested Citation

  • Han Hong & Matthew Shum, 2000. "A Semiparametric Estimator for Dynamic Optimization Models," Economics Working Paper Archive 461, The Johns Hopkins University,Department of Economics, revised Nov 2001.
  • Handle: RePEc:jhu:papers:461

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    References listed on IDEAS

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    6. Martin Pesendorfer & Philipp Schmidt-Dengler, 2003. "Identification and Estimation of Dynamic Games," NBER Working Papers 9726, National Bureau of Economic Research, Inc.
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    13. Powell, James L & Stock, James H & Stoker, Thomas M, 1989. "Semiparametric Estimation of Index Coefficients," Econometrica, Econometric Society, vol. 57(6), pages 1403-1430, November.
    14. Benkard, C. Lanier & Bajari, Patrick, 2001. "Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Research Papers 1691, Stanford University, Graduate School of Business.
    15. Patrick Bajari & C. Lanier Benkard, 2001. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Working Papers 01010, Stanford University, Department of Economics.
    16. Victor Aguirregabiria & Pedro Mira, 2007. "Sequential Estimation of Dynamic Discrete Games," Econometrica, Econometric Society, vol. 75(1), pages 1-53, January.
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    Cited by:

    1. Rosa L. Matzkin & James Heckman & Lars Nesheim, 2002. "Nonparametric Estimation and Nonadditive Hedonic Models," Working Papers 51, Universidad de San Andres, Departamento de Economia, revised Jun 2002.

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