Minimum Distance Estimators for Dynamic Games

Abstract

We develop a minimum distance estimator for dynamic games of incomplete information. We take a two-step approach, following Hotz and Miller (1993), based on the pseudo-model that does not solve the dynamic equilibrium in order to circumvent the potential indeterminacy issues associated with multiple equilibria. The class of games estimable by our methodology includes the familiar discrete unordered action games as well as games where players' actions are monotone (discrete, continuous or mixed) in the their private values. We also provide conditions for the existence of pure strategy Markov perfect equilibria in monotone action games under increasing differences condition.

Keywords: Dynamic Games, Markov Perfect Equilibrium, Semiparametric Estimation with Nonsmooth Objective Functions

JEL Classification: C13, C14, C15, C51