NBER

Carlos A. Manzanares

Department of Economics
Vanderbilt University
VU Station B, Box #351819
2301 Vanderbilt Place, Nashville, TN 37235

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Vanderbilt University

NBER Working Papers and Publications

April 2015Improving Policy Functions in High-Dimensional Dynamic Games
with Ying Jiang, Patrick Bajari: w21124
In this paper, we propose a method for finding policy function improvements for a single agent in high-dimensional Markov dynamic optimization problems, focusing in particular on dynamic games. Our approach combines ideas from literatures in Machine Learning and the econometric analysis of games to derive a one-step improvement policy over any given benchmark policy. In order to reduce the dimensionality of the game, our method selects a parsimonious subset of state variables in a data-driven manner using a Machine Learning estimator. This one-step improvement policy can in turn be improved upon until a suitable stopping rule is met as in the classical policy function iteration approach. We illustrate our algorithm in a high-dimensional entry game similar to that studied by Holmes (2011) a...

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