An Instrumental Variable Approach to Dynamic Models

Steven Berry () and Giovanni Compiani

No 27756, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a new class of methods for identification and inference in dynamic models with serially correlated unobservables, which typically imply that state variables are econometrically endogenous. In the context of Industrial Organization, these state variables often reflect econometrically endogenous market structure. We propose the use of Generalized Instrument Variables methods to identify those dynamic policy functions that are consistent with instrumental variable (IV) restrictions. Extending popular "two-step" methods, these policy functions then identify a set of structural parameters that are consistent with the dynamic model, the IV restrictions and the data. We provide computed illustrations to both single-agent and oligopoly examples. We also present a simple empirical analysis that, among other things, supports the counterfactual study of an environmental policy entailing an increase in sunk costs.

JEL-codes: C26 C57 L1 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-dcm and nep-ecm
Note: IO
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Citations: View citations in EconPapers (3)

Published as Steven T Berry & Giovanni Compiani, 2023. "An Instrumental Variable Approach to Dynamic Models," The Review of Economic Studies, vol 90(4), pages 1724-1758.

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Journal Article: An Instrumental Variable Approach to Dynamic Models (2023)
Working Paper: An Instrumental Variable Approach to Dynamic Models (2020)
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