Solving dynamic discrete choice models using smoothing and sieve methods

Dennis Kristensen, Patrick K. Mogensen, Jong-Myun Moon () and Bertel Schjerning
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Patrick K. Mogensen: Institute for Fiscal Studies
Jong-Myun Moon: Institute for Fiscal Studies and University College London

No CWP15/19, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: We propose to combine smoothing, simulations and sieve approximations to solve for either the integrated or expected value function in a general class of dynamic discrete choice (DDC) models. We use importance sampling to approximate the Bellman operators defining the two functions. The random Bellman operators, and therefore also the corresponding solutions, are generally non-smooth which is undesirable. To circumvent this issue, we introduce a smoothed version of the random Bellman operator and solve for the corresponding smoothed value function using sieve methods. We show that one can avoid using sieves by generalizing and adapting the “self-approximating” method of Rust (1997b) to our setting. We provide an asymptotic theory for the approximate solutions and show that they converge with vN-rate, where N is number of Monte Carlo draws, towards Gaussian processes. We examine their performance in practice through a set of numerical experiments and find that both methods perform well with the sieve method being particularly attractive in terms of computational speed and accuracy.

Keywords: Dynamic discrete choice; numerical solution; Monte Carlo; sieves (search for similar items in EconPapers)
Date: 2019-04-03
New Economics Papers: this item is included in nep-cmp, nep-dcm and nep-ecm
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Related works:
Journal Article: Solving dynamic discrete choice models using smoothing and sieve methods (2021)
Working Paper: Solving Dynamic Discrete Choice Models Using Smoothing and Sieve Methods (2020)
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