Approximation-Robust Inference in Dynamic Discrete Choice

TL;DR

This paper introduces a method for valid inference in dynamic discrete choice models that explicitly accounts for approximation errors, enabling more reliable results without excessive computational costs.

Contribution

It develops a set estimation and inference approach that incorporates approximation errors, improving the reliability of dynamic discrete choice analysis.

Findings

Method effectively accounts for approximation bias

Simulation shows practical applicability

Enhances trade-off management between bias and computation

Abstract

Estimation and inference in dynamic discrete choice models often relies on approximation to lower the computational burden of dynamic programming. Unfortunately, the use of approximation can impart substantial bias in estimation and results in invalid confidence sets. We present a method for set estimation and inference that explicitly accounts for the use of approximation and is thus valid regardless of the approximation error. We show how one can account for the error from approximation at low computational cost. Our methodology allows researchers to assess the estimation error due to the use of approximation and thus more effectively manage the trade-off between bias and computational expedience. We provide simulation evidence to demonstrate the practicality of our approach.