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An Instrumental Variable Approach to Dynamic Models

Author

Listed:
  • Steven T Berry
  • Giovanni Compiani
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.

Suggested Citation

  • Steven T Berry & Giovanni Compiani, 2023. "An Instrumental Variable Approach to Dynamic Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(4), pages 1724-1758.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:4:p:1724-1758.
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    File URL: http://hdl.handle.net/10.1093/restud/rdac061
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    3. Sasaki, Yuya & Takahashi, Yuya & Xin, Yi & Hu, Yingyao, 2023. "Dynamic discrete choice models with incomplete data: Sharp identification," Journal of Econometrics, Elsevier, vol. 236(1).

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    More about this item

    Keywords

    Dynamic models; Instrumental Variables; State Dependence; Initial Conditions;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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