Working Paper: NBER ID: w27756
Authors: Steven T. Berry; Giovanni Compiani
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.
Keywords: Instrumental Variables; Dynamic Models; Industrial Organization
JEL Codes: C26; C57; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| endogenous market structure (n) (D40) | firm entry decisions (L26) |
| serially correlated unobservables (C22) | biased estimates of the effect of n on entry probabilities (C29) |
| IV methods (C26) | correct estimation of the causal effect of market structure on firm entry (L11) |
| IV methods (C26) | counterfactual analyses that reflect the true dynamics of entry and exit (D43) |