Stochastic Algorithms for Dynamic Models: Markov Perfect Equilibrium, and the 'Curse' of Dimensionality

Ariel Pakes and Paul McGuire ()
Additional contact information
Paul McGuire: Economic Growth Center, Yale University, https://egc.yale.edu/

No 1144, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper provides an algorithm for computing policies for dynamic economic models whose state vectors evolve as ergodic Markov processes. The algorithm can be described as a simple learning process (one that agents might actually use). It has two features which break the relationship between its computational requirements and the dimension of the model's state space. First the integral over future states needed to determine policies is never calculated; rather it is estimated by a simple average of past outcomes. Second, the algorithm never computes policies at all points. Iterations are defined by a location and only policies at that location are computed. Random draws from the distribution determined by those policies determine the next location. This selection only repeatedly hits the recurrent class of points, a subset of the feasible set whose cardinality is not directly tied to the dimension of the state space. Our motivating example is Markov Perfect Equilibria (a leading model of industry dynamics; see Maskin and Tirole, 1988). Though estimators for the primitive parameters of these models are often available, computational problems have made it difficult to use them in applied analysis. We provide numerical results which show that our algorithm can be several orders of magnitude faster than standard algorithms in this case; opening up new possibilities for applied work.

Pages: 32 pages
Date: 1997-01
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Published in Econometrica (2001), 69(5): 1261-1281

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d11/d1144.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1144

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().