Journal Article

Structural Versus Reduced-Form Estimation of Optimal Stopping Problems

Bill Provencher

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 79, issue 2, pages 357-368
Published in print May 1997 | ISSN: 0002-9092
Published online May 1997 | e-ISSN: 1467-8276 | DOI: https://dx.doi.org/10.2307/1244135

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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.

Keywords: optimal stopping problems; reduced-form estimation; C510; Q120; Q150

Journal Article.  0 words. 

Subjects: Econometric Modelling ; Agricultural Economics