An Instrumental Variable Approach to Dynamic Models

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Abstract/Contents

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.

Type of resource	text
Date created	July 12, 2021

Location	https://purl.stanford.edu/qc912jv1902

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Preferred citation: Berry, S. and Compiani, G. (2021). An Instrumental Variable Approach to Dynamic Models. Stanford Digital Repository. Available at https://purl.stanford.edu/qc912jv1902

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