Constrainted Optimization Approaches to Estimation of Structural Models

Che-Lin Su and Kenneth Judd

No 1460, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: Maximum likelihood estimation of structural models is often viewed as computationally difficult. This impression is due to a focus on the Nested Fixed-Point approach. We present a direct optimization approach to the general problem and show that it is significantly faster than the NFXP approach when applied to the canonical Zurcher bus repair model. The NFXP approach is inappropriate for estimating games since it requires finding all Nash equilibria of a game for each parameter vector considered, a generally intractable computational problem. We formulate the problem of maximum likelihood estimation of games as a constrained optimization problem that is qualitatively no more difficult to solve than standard maximum likelihood problems. The direct optimization approach is also applicable to other structural estimation methods such as methods of moments, and also allows one to use computationally intensive bootstrap methods to calculate inference. The MPEC approach is also easily implemented on software with high-level interfaces. Furthermore, all the examples in this paper were computed using only free resources available on the web.

Keywords: Constrained Optimization; Structural Estimation; Maximum Likelihood Estimation; Games with Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: C13 C61 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (22)

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Journal Article: Constrained Optimization Approaches to Estimation of Structural Models (2012)
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