Chapter 51 Structural estimation of markov decision processes

This chapter summarizes the ability of the models to track the shift in departure rates induced by the 1982 window plan. All forecasts were based on the estimated utility function parameters using data prior to 1982. Using these parameters, predictions were generated from all four models after incorporating the extra bonus provisions of the window plan. The structural models were generally able to accurately predict the large increase in departure rates induced by the window plan, although once again none of the models was able to capture the peak in departure rates at age 65. On the other hand, the reduced-form probit model predicted that the window plan had essentially no effect on departure rates. Other reduced-form specifications greatly overpredicted departure rates under the window plan.