Equilibrium Counterfactuals

The objective of applied structural microeconometrics is to identify policy-invariant parameters so alternative policies can be assessed. However, the common practice of treating policy changes as zero probability exogenous "counterfactuals" violates rational expectations: Agents understand policy changes are  positive probability endogenous events which the structural estimation is intended to inform. We analytically characterize implications for moment-based parameter inference. As shown, if policy change is optimal, inference is biased. Further, the traditional structural identi…cation assumption, constant partial derivative sign, is neither necessary nor sufficient with policy control. We offer an alternative identifying assumption: constant total derivative sign accounting for inference-policy feedback. Under this assumption, rational expectations can be imposed computationally (algorithmically) to generate unbiased inference and implement …first-best. The quantitative importance of these e¤ects in applied settings is illustrated by calibrating the Leland (1994) model to the Tax Cuts and Jobs Act of 2017.