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Approximate Solutions to Stochastic Dynamic Programs

Published online by Cambridge University Press:  11 February 2009

Steven Stern
Steven Stern
Affiliation:
University of Virginia
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Abstract

This paper examines the properties of various approximation methods for solving stochastic dynamic programs in structural estimation problems. The problem addressed is evaluating the expected value of the maximum of available choices. The paper shows that approximating this by the maximum of expected values frequently has poor properties. It also shows that choosing a convenient distributional assumptions for the errors and then solving exactly conditional on the distributional assumption leads to small approximation errors even if the distribution is misspecified.

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Type
Articles
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Econometric Theory , Volume 13 , Issue 3 , June 1997 , pp. 392 - 405
Copyright
Copyright © Cambridge University Press 1997

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