Ertian Chen, Hiroyuki Kasahara, Katsumi Shimotsu
arXiv 29 Apr 2026 · Econometrics
arXiv:2604.26205 · PDF · DOI · OpenAlex · Extracted main text
Estimating dynamic discrete choice models with unobserved heterogeneity is computationally costly because it requires repeatedly solving fixed-point equations for all unobserved types. We develop the EM-NPL(q) framework that combines the Expectation-Maximization (EM) algorithm with an inner fixed-point solver truncated to q iterations. For the workhorse class of linear-in-parameters models, we establish a truncation-invariance result: for any q$\geq$1, EM-NPL(q) is numerically identical to the EM-NPL estimator that solves the inner fixed-point problem to convergence. Therefore, the choice of q affects computation but not statistical properties. We also establish consistency, asymptotic normality of our estimator, and local convergence of the EM-NPL(q) algorithm. In Monte Carlo simulations, EM-NPL(q) reduces runtime by at least 20% and can be 3--5 times faster. In an application to cola demand, we show that ignoring unobserved heterogeneity understates long-run own-price elasticities by up to 60%, short-run elasticities by up to 85%, and compensating variation from a soda tax by up to 90%.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Aguirregabiria, Victor and Magesan, Arvind (2023) Solving discrete choice dynamic programming models using euler equations | 1.000 | 8 | 4 | 100% |
| 2 | Arcidiacono, Peter and Miller, Robert A (2011) Conditional choice probability estimation of dynamic discrete choice models with unobserved heterogeneity | 1.000 | 8 | 4 | 100% |
| 3 | Aguirregabiria, Victor and Mira, Pedro (2002) Swapping the nested fixed point algorithm: A class of estimators for discrete Markov decision models | 1.000 | 6 | 4 | 100% |
| 4 | Aguirregabiria, Victor and Mira, Pedro (2007) Sequential estimation of dynamic discrete games | 0.980 | 17 | 5 | 94% |
| 5 | Dearing, Adam and Blevins, Jason R (2025) Efficient and convergent sequential pseudo-likelihood estimation of dynamic discrete games | 0.874 | 5 | 2 | 100% |
| 6 | Aguirregabiria, Victor and Marcoux, Mathieu (2021) Imposing equilibrium restrictions in the estimation of dynamic discrete games | 0.811 | 4 | 2 | 100% |
| 7 | Kasahara, Hiroyuki and Shimotsu, Katsumi (2009) Nonparametric identification of finite mixture models of dynamic discrete choices self | 0.644 | 2 | 2 | 100% |
| 8 | Saad, Yousef (2003) Iterative methods for sparse linear systems | 0.644 | 2 | 2 | 100% |
| 9 | Hotz, V Joseph and Miller, Robert A (1993) Conditional choice probabilities and the estimation of dynamic models | 0.511 | 2 | 1 | 100% |
| 10 | Rust, John (1987) Optimal replacement of GMC bus engines: An empirical model of Harold Zurcher | 0.511 | 2 | 1 | 100% |
Showing the top 10 of 31 scored citations.