Structural Models for Policy-Making: Coping with Parametric Uncertainty

Philipp Eisenhauer (), Janos Gabler and Lena Janys ()
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Philipp Eisenhauer: University of Bonn
Janos Gabler: IZA
Lena Janys: Newcastle University

No 14317, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: uncertainty quantification; structural estimation; statistical decision rules (search for similar items in EconPapers)
JEL-codes: C44 C54 D81 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2021-04
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