Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models

Advances in Econometrics, Volume 31, Structural Microeconometrics, E. Choo and M. Shum, eds. (December 2013), 3-44.

34 Pages Posted: 3 Jun 2013 Last revised: 30 Oct 2016

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

Arvind Magesan

University of Calgary

Date Written: December 1, 2013

Abstract

We derive marginal conditions of optimality (i.e., Euler equations) for a general class of Dynamic Discrete Choice (DDC) structural models. These conditions can be used to estimate structural parameters in these models without having to solve for or approximate value functions. This result extends to discrete choice models the GMM-Euler equation approach proposed by Hansen and Singleton (1982) for the estimation of dynamic continuous decision models. We first show that DDC models can be represented as models of continuous choice where the decision variable is a vector of choice probabilities. We then prove that the marginal conditions of optimality and the envelope conditions required to construct Euler equations are also satisfied in DDC models. The GMM estimation of these Euler equations avoids the curse of dimensionality associated to the computation of value functions and the explicit integration over the space of state variables. We present an empirical application and compare estimates using the GMM-Euler equations method with those from maximum likelihood and two-step methods.

Keywords: Dynamic discrete choice structural models; Euler equations; Choice probabilities

JEL Classification: C13, C35, C51, C61

Suggested Citation

Aguirregabiria, Victor and Magesan, Arvind Nathan, Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models (December 1, 2013). Advances in Econometrics, Volume 31, Structural Microeconometrics, E. Choo and M. Shum, eds. (December 2013), 3-44., Available at SSRN: https://ssrn.com/abstract=2273618 or http://dx.doi.org/10.2139/ssrn.2273618

Victor Aguirregabiria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
4169784358 (Phone)

HOME PAGE: http://individual.utoronto.ca/vaguirre/

Arvind Nathan Magesan

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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