APPROXIMATE SOLUTIONS TO STOCHASTIC DYNAMIC PROGRAMS

This paper examines the properties of various approximation methods fo r solving stochastic dynamic programs in structural estimation problem s. The problem addressed is evaluating the expected value of the maxim um of available choices. The paper shows that approximating this by th e maximum of expected values frequently has poor properties. It also s hows that choosing a convenient distributional assumptions for the err ors and then solving exactly conditional on the distributional assumpt ion leads to small approximation errors even if the distribution is mi sspecified.