Combinatorial Discrete Choice: Theory and Application to Multinational Production

Costas Arkolakis, Fabian Eckert and Rowan Shi

No 31877, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Discrete choice problems with complementarities among options quickly grow infeasible to solve, since they generically require evaluating all combinations of choices. We develop a solution method that applies whenever choices are weakly complementary or substitutable, using the implied choice monotonicity to discard suboptimal combinations without computing their payoff. It is orders of magnitude faster than existing approaches, finds the global solution, and extends to heterogeneous-agent settings. Using our method, we calibrate a general equilibrium model of multinational firms selecting global production locations to show that complementarities among locations can amplify, dampen, or even reverse the welfare gains from multinational production.

JEL-codes: F12 F21 F6 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-cis, nep-dcm and nep-int
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