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Structural models for policy-making: Coping with parametric uncertainty

Philipp Eisenhauer, Jano\'s Gabler and Lena Janys

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Abstract: The ex-ante evaluation of policies using structural econometric models is based on estimated parameters as a stand-in for the truth. This practice ignores uncertainty in the counterfactual policy predictions of the model. We develop a generic approach that deals with parametric uncertainty using uncertainty sets and frames model-informed policymaking as a decision problem under uncertainty. The seminal human capital investment model by Keane and Wolpin (1997) provides us with a well-known, influential, and empirically-grounded test case. We document considerable uncertainty in their policy predictions and highlight the resulting policy recommendations from using different formal rules on decision-making under uncertainty.

Date: 2021-03, Revised 2021-04
New Economics Papers: this item is included in nep-rmg
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