Structural models for policy-making: Coping with parametric uncertainty
Abstract
The ex-ante evaluation of policies using structural econometric models is based on estimated parameters as a stand-in for the true parameters. This practice ignores uncertainty in the counterfactual policy predictions of the model. We develop a generic approach that deals with parametric uncertainty using uncertainty sets and frames model-informed policy-making as a decision problem under uncertainty. The seminal human capital investment model by Keane and Wolpin (1997) provides a well-known, influential, and empirically-grounded test case. We document considerable uncertainty in the models's policy predictions and highlight the resulting policy recommendations obtained from using different formal rules of decision-making under uncertainty.
Keywords
Cite
@article{arxiv.2103.01115,
title = {Structural models for policy-making: Coping with parametric uncertainty},
author = {Philipp Eisenhauer and Janoś Gabler and Lena Janys and Christopher Walsh},
journal= {arXiv preprint arXiv:2103.01115},
year = {2022}
}