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Sequential Estimation of Dynamic Discrete Games

  • Victor Aguirregabiria

    (Boston University)

  • Pedro Mira

    (CEMFI)

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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File URL: http://128.118.178.162/eps/io/papers/0406/0406006.pdf
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Paper provided by EconWPA in its series Industrial Organization with number 0406006.

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Length: 38 pages
Date of creation: 17 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpio:0406006
Note: Type of Document - pdf; pages: 38
Contact details of provider: Web page: http://128.118.178.162

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  20. Andrea Moro, 2003. "The Effect Of Statistical Discrimination On Black-White Wage Inequality: Estimating A Model With Multiple Equilibria," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 467-500, 05.
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