Pairwise-Difference Estimation of a Dynamic Optimization Model
- Creators
- Hong, Han
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Shum, Matthew
Abstract
We develop a new estimation methodology for dynamic optimization models with unobserved shocks and deterministic accumulation of the observed state variables. Investment models are an important example of such models. Our pairwise-difference approach exploits two common features of these models: (1) the monotonicity of the agent's decision (policy) function in the shocks, 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 shocks across agents. We illustrate our procedure by estimating a dynamic trading model for the milk production quota market in Ontario, Canada.
Additional Information
© 2009 The Review of Economic Studies Limited. First version received December 2004; final version accepted April 2009 (Eds.). We thank Phil Cairns at the Dairy Farmers of Ontario for providing the data and patiently answering our questions. We thank J. Adda, V. Aguirregabiria, P. Bajari, L. Benkard, R. Blundell, B. Honore, H. Ichimura, S. Khan, C. Meghir, E. Miravete, S. Ng, A. Pakes, M. Pesendorfer, G. Ridder, L. Roberts, F. Wolak, the editor and two referees, and seminar participants at various universities and conferences for helpful discussions. We are grateful to the NSF (SES-0079495, SES-0721015), the Sloan Foundation and SSHRC for financial support.Additional details
- Eprint ID
- 18313
- DOI
- 10.1111/j.1467-937X.2009.00576.x
- Resolver ID
- CaltechAUTHORS:20100514-145451390
- SES-0079495
- NSF
- SES-0721015
- NSF
- Alfred P. Sloan Foundation
- Social Sciences and Humanities Research Council (SSHRC)
- Created
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2010-06-02Created from EPrint's datestamp field
- Updated
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2021-11-08Created from EPrint's last_modified field