Dynamic Structural Models for Policy Evaluation

Course Overview

This course deals with methods and applications of dynamic discrete choice structural models in Economics. The methods that we will discuss are often used by researchers with interests in Labor Economics, Industrial Organization, Quantitative Macro, Development Economics and many other fields in Applied Micro. The course focuses on the estimation of dynamic discrete choice structural models that allow for modeling the behavior of forward looking agents making discrete decisions. These models constitute a useful tool for policy evaluation and an interesting complement to reduced form approaches. In particular, they have the advantage of allowing for ex-ante policy evaluation, and of providing external validity for the inference, subject to the model assumptions. They also have the benefit of providing a close link between economic theory and empirics, and the possibility of making inference about the predictions of a model.

The course is organized in three blocks. In the first one (3-4 hours), we will introduce the basic framework, and will review standard estimation techniques based on Maximum Likelihood, which involve solving the dynamic programming problems numerically. The second one (5 hours) will cover an alternative set of estimation methods grouped under the label Conditional Choice Probability estimation methods, which avoid the need of solving for the value functions in estimation. Finally, the third one (1-2 hours) will review the additional complications involved by dynamic problems that involve game theoretical responses to other agent’s choices. Theory will be complemented with examples from published papers in the literature.

Practical sessions will be devoted to the numerical solution and estimation of these models using STATA (MATA), using simple empirically relevant applications and instructing how to extend these simple applications into fully-fledged rich settings like the ones estimated in the published articles described in the lectures.

Both theory and practical sessions are expected to be interactive. Depending on the class size, breakdown sessions will be considered to foster interaction, especially in the practical sessions.