Fast Estimation of Structural Economic Models with Fixed Effects

Abstract:

We propose a novel approximate fixed effects (AFE) estimator which makes it computationally feasible to estimate non-linear economic models with fixed effects. We study the asymptotic behavior of the AFE estimator and show it converges to the standard fixed effects (FE) estimator under mild regularity conditions. Monte Carlo results indicate a fast convergence rate. The AFE estimator relies on interpolation of the FE criterion function, which greatly reduces the number of times the underlying economic model needs to be solved. In the case of dynamic programming models this can reduce the estimation time from days to minutes. To showcase our estimator, we estimate a buffer-stock consumption-saving model on high quality Danish register data allowing for unrestricted heterogeneity in the discount factor. We find substantial variation in the discount factor across invidiuals.

About Dennis Kristensen

Dennis Kristensen is a Professor of Economics at University College London (UCL). Prior to arriving at UCL in 2011, he held positions at Columbia University and University of Wisconsin-Madison. He obtained his PhD in Economics at London School of Economics in 2004 after studies in mathematics and economics at University of Copenhagen. Dennis Kristensens research interests include econometric theory, applied micro and financial econometrics. He has published in, amongst others, American Economic Review, Econometrica, Econometric Theory, Journal of Econometrics, Journal of Business and Economic Statistics, and Journal of Financial Economics. He is a co-editor of Econometric Theory and the Econometrics Journal and a member of the editorial board of Review of Economic Studies.

https://sites.google.com/site/econkristensen/