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Estimating Discrete-Continuous Choice Models: The Endogenous Grid Method with Taste Shocks

Fedor Iskhakov (), Thomas Jørgensen (), John Rust () and Bertel Schjerning

No 15-19, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous gridpoint method (EGM) to discrete-continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice-speci c IID extreme value taste shocks. We present Monte Carlo experiments that demonstrate the reliability and eciency of the DC-EGM and the associated Maximum Likelihood estimator for structural estimation of a life cycle model of consumption with discrete retirement decisions.

Keywords: Structural estimation; lifecycle model; discrete and continuous choice; retirement choice; endogenous gridpoint method; nested xed point algorithm; extreme value taste shocks; smoothed max function. (search for similar items in EconPapers)
JEL-codes: C13 C63 D91 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015-11-27
New Economics Papers: this item is included in nep-cmp, nep-dcm, nep-dge, nep-ecm and nep-ore
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