Structural Models for Policy-Making: Coping with Parametric Uncertainty

Philipp Eisenhauer (), Janos Gabler () and Lena Janys ()
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Philipp Eisenhauer: University of Bonn
Janos Gabler: University of Bonn and IZA
Lena Janys: University of Bonn

No 82, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: The ex-ante evaluation of policies using structural econometric models is based on estimated parameters as a stand-in for the truth. 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 policymaking as a decision problem under uncertainty. The seminal human capital investment model by Keane and Wolpin (1997) provides us with a well-known, influential, and empirically-grounded test case. We document considerable uncertainty in their policy predictions and highlight the resulting policy recommendations from using different formal rules on decision-making under uncertainty.

Pages: 37 pages
Date: 2021-04
New Economics Papers: this item is included in nep-rmg
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_082_2021.pdf First version, 2021 (application/pdf)

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