Another Look at the Identification of Dynamic Discrete Decision Processes

41 Pages Posted: 26 Apr 2005

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

Date Written: April 2005

Abstract

This paper presents an econometric approach to estimate the behavioral effects of counterfactual policy experiments in the context of dynamic decision models where the current utility function and the distribution of unobservables are nonparametrically specified. Previous studies have shown that the identification of the current utility function in dynamic decision models requires of stronger assumptions than in static decision models. We show in this paper that knowledge of the current utility function (or of a normalized utility function) is not necessary to identify counterfactual choice probabilities in dynamic models. To identify these counterfactuals we need the probability distribution of the unobservables and the difference between the present value of choosing always the same alternative and the present value of deviating one period from this strategy. We show that both functions are identified from the factual choice probabilities under similar conditions as in static decision models. Based on this result we propose a nonparametric procedure to estimate the behavioral effects of counterfactual experiments in dynamic decision models. We apply this method to evaluate the effects of an investment subsidy program in the context of a model of machine replacement.

Keywords: Dynamic discrete decision processes, nonparametric identification, counterfactual experiments

JEL Classification: C13, C25

Suggested Citation

Aguirregabiria, Victor, Another Look at the Identification of Dynamic Discrete Decision Processes (April 2005). Available at SSRN: https://ssrn.com/abstract=707362 or http://dx.doi.org/10.2139/ssrn.707362

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/

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