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Structural Versus Reduced‐Form Estimation of Optimal Stopping Problems
Author(s) -
Provencher Bill
Publication year - 1997
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1244135
Subject(s) - logit , optimal stopping , context (archaeology) , estimation , econometrics , class (philosophy) , interpretation (philosophy) , stopping time , probit , econometric model , economics , mathematics , computer science , mathematical economics , mathematical optimization , statistics , artificial intelligence , paleontology , management , biology , programming language
In this paper I examine several statistical, interpretive, and policy implications of reduced‐form (probit or logit) estimation of optimal stopping problems. The discussion proceeds in the context of an examination of the timber harvest decision of nonindustrial private forest (NIPF) owners. For a large class of optimal stopping problems a reduced‐form model which closely approximates the statistical performance of its structural counterpart is readily found. Still, failure to properly interpret the relationship between the reduced‐form model and the underlying optimal stopping problem invites flawed econometric analysis and inappropriate interpretation of reduced‐form coefficients.