Victor, Aguirregabiria (2009): A Method for Implementing Counterfactual Experiments in Models with Multiple Equilibria.
Download (184Kb) | Preview
This paper proposes a method for implementing counterfactual experiments in estimated models that have multiple equilibria. The method assumes that the researcher does not know the equilibrium selection mechanism and wants to impose minimum restrictions on it. Our key assumption is that the equilibrium selection function does not jump discontinuously between equilibria as we change marginally the structural parameters of the model. Under this assumption, we show that, although the equilibrium selection function is unknown, the researcher can obtain an approximation of this function in a neighborhood of the estimated values of the structural parameters. Under the additional assumption that the counterfactual equilibrium is stable, this approximation can be combined with iterations in the equilibrium mapping to obtain the exact counterfactual equilibrium. We illustrate the differences between our approach and other methods, such as the selection of a counterfactual equilibrium that is closer to the equilibrium in the data, and equilibrium mapping iterations using the equilibrium in the data as the initial value. We show that, in general, these alternative methods are not consistent with the assumption that the equilibrium selection mechanism is continuous with respect to the structural parameters.
|Item Type:||MPRA Paper|
|Original Title:||A Method for Implementing Counterfactual Experiments in Models with Multiple Equilibria|
|Keywords:||Structural models with multiple equilibria; Counterfactual experiments; Equilibrium selection.|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C60 - General
|Depositing User:||Victor Aguirregabiria|
|Date Deposited:||12. Oct 2009 13:10|
|Last Modified:||19. Feb 2013 13:56|
Aguirregabiria, V. and P. Mira (2007): "Sequential estimation of dynamic discrete games," Econometrica, 75, 1-53.
Bajari, P., L. Benkard and J. Levin (2007): "Estimating dynamic models of imperfect competition," Econometrica, 75, 1331-1370.
Bajari, P., H. Hong, J. Krainer, and D. Nekipelov (2009): "Estimating Static Models of Strategic Interactions," Journal of Business and Economic Statistics. Forthcoming.
Brock, W., and S. Durlauf (2001): "Discrete choice with social interactions", Review of Economics Studies, 68, 235-260.
Collard-Wexler, A. (2006): "Demand Fluctuations and Plant Turnover in the Ready-Mix Concrete Industry," manuscript. New York University.
Doraszelski, U., and Satterthwaite, M. (2009): "Computable Markov-Perfect Industry Dynamics," Manuscript. Department of Economics. Harvard University.
Dunne, T., S. Klimek, M. Roberts, and Y. Xu (2009): "Entry, Exit and the Determinants of Market Structure," NBER Working Paper 15313.
Judd, K. (1998): "Numerical Methods in Economics," The MIT Press. Cambridge, Massachusetts.
McKelvey, R., and T. Palfrey (1995): "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, 10, 6-38.
Pesendorfer, M. and Schmidt-Dengler (2008): "Asymptotic Least Squares Estimators for Dynamic Games," The Review of Economic Studies, 75, 901-928.
Ryan, S. (2009): "The Costs of Environmental Regulation in a Concentrated Industry," Manuscript, MIT Department of Economics.
Sweeting, A. (2007): ""Dynamic Product Repositioning in Differentiated Product Industries: The Case of Format Switching in the Commercial Radio Industry", NBER WP 13522.