Estimation of Finite Sequential Games

I propose a new estimation method for …nite sequential games that is e¢ cient, computationally attractive, and applicable to a fairly general class of …nite sequential games that is beyond the scope of existing studies. The major challenge is computation of high-dimensional truncated integration whose domain is complicated by strategic interaction. This complication resolves when unobserved o¤-the-equilibrium-path strategies are controlled for. Separately evaluating the likelihood contribution of each subgame perfect equilibrium that generates the observed outcome allows the use of the GHK simulator, a widely used importance-sampling probit simulator. Monte Carlo experiments demonstrate the performance and robustness of the proposed method. JEL Codes: C35, C72, C63, C31 Comments from Victor Aguirregabiria, Han Hong, Susumu Imai, Andy McLennan, Robert Porter, William Schworm, and Junichi Suzuki signi…cantly improved the paper at various stages. Earlier versions of the paper were circulated under the title "Estimating Sequential-Move Games by a Recursive Conditioning Simulator." School of Economics, University of New South Wales. Address: School of Economics, ASB, UNSW, Sydney, NSW 2052, Australia. E-mail: [email protected]