Dynamic Optimization in Models for State Panel Data: A Cohort Panel Data Model of the Effects of Divorce Laws on Divorce Rates

Abstract

We present a new approach to the estimation of dynamic models using panel data, not on individuals, but aggregated to some level such as the school, county or state. This approach embeds the reduced form implications of dynamic optimization for exiting a chosen state (via divorce, dropping out, employment, etc.) into a model suitable for estimation with state panel data or similar aggregates (county, SMSA, etc.). With forward looking behaviors, exogenous changes in laws or rules give rise to selection effects on those considering entry and surprise effects for those who have already entered. The application to the effects of divorce laws on divorce rates.