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Publication date: 13 December 2013

Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models

Victor Aguirregabiria and Arvind Magesan

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…

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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 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.

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Structural Econometric Models
Type: Book
DOI: https://doi.org/10.1108/S0731-9053(2013)0000032001
ISBN: 978-1-78350-052-9

Keywords

  • Dynamic discrete choice structural models
  • Euler equations
  • choice probabilities
  • C35
  • C51
  • C61

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Book part
Publication date: 13 December 2013

List of Contributors

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Structural Econometric Models
Type: Book
DOI: https://doi.org/10.1108/S0731-9053(2013)0000032017
ISBN: 978-1-78350-052-9

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Book part
Publication date: 13 December 2013

Introduction

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Structural Econometric Models
Type: Book
DOI: https://doi.org/10.1108/S0731-9053(2013)0000032018
ISBN: 978-1-78350-052-9

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