SIMULATED MAXIMUM LIKELIHOOD ESTIMATION BASED ON FIRST-ORDER CONDITIONS

Michael P Keane ()

International Economic Review, 2009, vol. 50, issue 2, pages 627-675

Abstract: I describe a strategy for structural estimation that uses simulated maximum likelihood (SML) to estimate the structural parameters appearing in a model's first-order conditions (FOCs). Generalized method of moments (GMM) is often the preferred method for estimation of FOCs, as it avoids distributional assumptions on stochastic terms, "provided" all structural errors enter the FOCs additively, giving a single composite additive error. But SML has advantages over GMM in models where multiple structural errors enter the FOCs nonadditively. I develop new simulation algorithms required to implement SML based on FOCs, and I illustrate the method using a model of U.S. multinational corporations. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2009

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