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Sensitivity Analysis for Dynamic Discrete Choice Models

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  • Chun Pong Lau

Abstract

In dynamic discrete choice models, some parameters, such as the discount factor, are being fixed instead of being estimated. This paper proposes two sensitivity analysis procedures for dynamic discrete choice models with respect to the fixed parameters. First, I develop a local sensitivity measure that estimates the change in the target parameter for a unit change in the fixed parameter. This measure is fast to compute as it does not require model re-estimation. Second, I propose a global sensitivity analysis procedure that uses model primitives to study the relationship between target parameters and fixed parameters. I show how to apply the sensitivity analysis procedures of this paper through two empirical applications.

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  • Chun Pong Lau, 2024. "Sensitivity Analysis for Dynamic Discrete Choice Models," Papers 2408.16330, arXiv.org.
    • Handle: RePEc:arx:papers:2408.16330
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    1. Magnus, J.R. & Neudecker, H., 1985. "Matrix differential calculus with applications to simple, Hadamard, and Kronecker products," Other publications TiSEM 1b2f1740-bfd1-4ea5-986c-9, Tilburg University, School of Economics and Management.
    2. Victor Aguirregabiria & Pedro Mira, 2002. "Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models," Econometrica, Econometric Society, vol. 70(4), pages 1519-1543, July.
    3. Isaiah Andrews & Matthew Gentzkow & Jesse M. Shapiro, 2017. "Measuring the Sensitivity of Parameter Estimates to Estimation Moments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1553-1592.
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