Varadarajan V. Chari, Principal Investigator
Michael P. Keane, Co-Principal Investigator

Estimation of Discrete Stochastic Dynamic Programming Models of Economic Behavior Using Monte Carlo Integration

This research concentrated on developing new methods to solve and estimate discrete stochastic dynamic programming (DS-SP) models and use these to study occupational and educational choices. In recent years it has become common in economics to model individuals who are making choices in dynamic environments as if they were solving a DS-SP problem to determine their optimal decisions. However, empirical implementation of such models has been hampered because their solution and estimation requires that very high-order numerical integrations be performed.

This research investigated the use of simulation methods to circumvent these integration problems. These methods were employed in three substantive projects. The first was a model of life cycle decisions of young women; the focus was on their human capital investment (i.e., school attendance and work), fertility and marriage decisions, and how these are affected by public welfare programs. After this model was completed, it was found to be useful for predicting the effects of changes in welfare rules on teenage childbearing and dropout rates, among other things. The second project was a model of decision-making under uncertainty about future prices, as applied to marketing problems. The third is a model of investments in health over the life cycle.

Research Group and Collaborators

Abby R. Barker, Faculty Collaborator
Ahmed Khawja, Graduate Student Researcher
Eric Olson, Faculty Collaborator
Kenneth I. Wolpin, Economics Department, University of Pennsylvania, Philadelphia, Pennsylvania