The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks
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The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks. / Iskhakov, Fedor; Jørgensen, Thomas H.; Rust, John; Schjerning, Bertel.
I: Quantitative Economics, Bind 8, Nr. 2, 01.07.2017, s. 317-365.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks
AU - Iskhakov, Fedor
AU - Jørgensen, Thomas H.
AU - Rust, John
AU - Schjerning, Bertel
PY - 2017/7/1
Y1 - 2017/7/1
N2 - We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous grid-point method (EGM) to discrete-continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice-specific independent and identically distributed extreme value taste shocks that are typically interpreted as “unobserved state variables” in structural econometric applications, or serve as “random noise” to smooth out kinks in the value functions in numerical applications. We present Monte Carlo experiments that demonstrate the reliability and efficiency of the DC-EGM algorithm and the associated maximum likelihood estimator for structural estimation of a life-cycle model of consumption with discrete retirement decisions.
AB - We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous grid-point method (EGM) to discrete-continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice-specific independent and identically distributed extreme value taste shocks that are typically interpreted as “unobserved state variables” in structural econometric applications, or serve as “random noise” to smooth out kinks in the value functions in numerical applications. We present Monte Carlo experiments that demonstrate the reliability and efficiency of the DC-EGM algorithm and the associated maximum likelihood estimator for structural estimation of a life-cycle model of consumption with discrete retirement decisions.
KW - Bellman equation
KW - discrete and continuous choice
KW - endogenous grid-point method
KW - Euler equation
KW - extreme value taste shocks
KW - Life-cycle model
KW - nested fixed point algorithm
KW - retirement choice
KW - smoothed max function
KW - structural estimation
U2 - 10.3982/QE643
DO - 10.3982/QE643
M3 - Journal article
AN - SCOPUS:85026308937
VL - 8
SP - 317
EP - 365
JO - Quantitative Economics
JF - Quantitative Economics
SN - 1759-7323
IS - 2
ER -
ID: 185187393