Constrained Optimization Approaches to Estimation of Structural Models

This paper by Fedor Iskhakov, Jinhyuk Lee, John Rust, Bertel Schjerning and Kyoungwon Seo is published in Econometrica, Volume 84, Issue 1, pages 365–370.

The computer code and the paper is avaiable at the web-page of the Econometric Society.

A preprint of the paper can be found at Bertel Schjerning's web-page.

Abstract

We revisit the comparison of mathematical programming with equilibrium constraints (MPEC) and nested fixed point (NFXP) algorithms for estimating structural dynamic models by Su and Judd (2012). Their implementation of the nested fixed point algorithm used successive approximations to solve the inner fixed point problem (NFXP-SA). We redo their comparison using the more efficient version of NFXP proposed by Rust (1987), which combines successive approximations and Newton–Kantorovich iterations to solve the fixed point problem (NFXP-NK). We show that MPEC and NFXP are similar in speed and numerical performance when the more efficient NFXP-NK variant is used.