Template-type: ReDIF-Paper 1.0
Author-Name: Marianne Bruins
Author-Workplace-Name: Nuffield College and Dept of Economics, Univesity of Oxford
Author-Email: marianne.bruins@nuffield.ox.ac.uk
Author-Name: James A. Duffy
Author-Workplace-Name: Nuffield College, Dept of Economics and Institute for New Economic Thinking at the Oxford Martin School, Univesity of Oxford
Author-Email: James.duffy@nuffield.ox.ac.uk.
Author-Name: Michael P. Keane
Author-Workplace-Name: Nuffield College and Dept of Economics, Univesity of Oxford
Author-Email: michael.keane@nuffield.ox.ac.uk
Author-Name: Anthony A. Smith, Jr
Author-Workplace-Name: Yale University
Title: Generalized Indirect Inference for Discrete Choice Models
Abstract: This paper develops and implements a practical simulation-based method for estimating
dynamic discrete choice models. The method, which can accommodate lagged dependent
variables, serially correlated errors, unobserved variables, and many alternatives, builds on
the ideas of indirect inference. The main difficulty in implementing indirect inference in
discrete choice models is that the objective surface is a step function, rendering gradientbased
optimization methods useless. To overcome this obstacle, this paper shows how to
smooth the objective surface. The key idea is to use a smoothed function of the latent
utilities as the dependent variable in the auxiliary model. As the smoothing parameter goes
to zero, this function delivers the discrete choice implied by the latent utilities, thereby
guaranteeing consistency. We establish conditions on the smoothing such that our estimator
enjoys the same limiting distribution as the indirect inference estimator, while at the same
time ensuring that the smoothing facilitates the convergence of gradient-based optimization
methods. A set of Monte Carlo experiments shows that the method is fast, robust, and
nearly as efficient as maximum likelihood when the auxiliary model is sufficiently rich.

X-Classification-JEL: 
X-Keywords: 
Length: 56 pages
Creation-Date: 2015-07-15
Number: 2015-W08
File-URL: https://www.nuffield.ox.ac.uk/economics/papers/2015/GII_July_22_2015.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1508