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Research Abstracts Online
January 2010 - March 2011

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University of Minnesota Twin Cities
College of Liberal Arts
Department of Economics

PI: Patrick L. Bajari

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

The goal of this research is to develop new methods to solve and estimate discrete stochastic dynamic programming (DS-DP) models, and use these to study decision-making in areas such as human capital investment, occupational choice, investment in health, and others. 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-DP problem to determine their optimal decisions. But empirical implementation of such models has been hampered because their solution and estimation requires that very high order numerical integrations be performed. This group investigated the use of simulation methods to circumvent these integration problems.

The research involves two projects. The first is a model of the childcare use and return-to-work decisions of working women after childbirth. When completed, this model will be useful for simulating effects of childcare costs on the work decisions of women and for analyzing how day-care use influences child outcomes. It will also be useful for predicting how policies like child-care subsidies, parental leave policies, etc., affect human capital interest by women. The second project is a model of investments in health and decisions to buy private health insurance. For instance, in the U.S., senior citizens are covered by Medicare, but many buy supplemental private insurance to cover things that Medicare leaves uncovered. In many other countries a similar situation exists, except that the analogue of Medicare provides partial insurance for the whole population. When completed, this model will be useful for predicting how changes in what is covered by Medicare would affect health and program costs.

Group Members

Michael P. Keane, Department of Economics and Finance, University of Technology, Sydney, New South Wales, Australia
Ahmed Khwaga, Fuqua School of Business, Duke University, Durham, North Carolina