Nonlinear Optimization Examples

Example 11.7: A Two-Equation Maximum Likelihood Problem

The following example and notation are taken from Bard (1974). A two-equation model is used to fit U.S. production data for the years 1909 - 1949, where z_1 is capital input, z_2 is labor input, z_3 is real output, z_4 is time in years (with 1929 as the origin), and z_5 is the ratio of price of capital services to wage scale. The data can be entered by using the following statements:

  
    proc iml; 
       z={ 1.33135 0.64629 0.4026 -20 0.24447, 
           1.39235 0.66302 0.4084 -19 0.23454, 
           1.41640 0.65272 0.4223 -18 0.23206, 
           1.48773 0.67318 0.4389 -17 0.22291, 
           1.51015 0.67720 0.4605 -16 0.22487, 
           1.43385 0.65175 0.4445 -15 0.21879, 
           1.48188 0.65570 0.4387 -14 0.23203, 
           1.67115 0.71417 0.4999 -13 0.23828, 
           1.71327 0.77524 0.5264 -12 0.26571, 
           1.76412 0.79465 0.5793 -11 0.23410, 
           1.76869 0.71607 0.5492 -10 0.22181, 
           1.80776 0.70068 0.5052  -9 0.18157, 
           1.54947 0.60764 0.4679  -8 0.22931, 
           1.66933 0.67041 0.5283  -7 0.20595, 
           1.93377 0.74091 0.5994  -6 0.19472, 
           1.95460 0.71336 0.5964  -5 0.17981, 
           2.11198 0.75159 0.6554  -4 0.18010, 
           2.26266 0.78838 0.6851  -3 0.16933, 
           2.33228 0.79600 0.6933  -2 0.16279, 
           2.43980 0.80788 0.7061  -1 0.16906, 
           2.58714 0.84547 0.7567   0 0.16239, 
           2.54865 0.77232 0.6796   1 0.16103, 
           2.26042 0.67880 0.6136   2 0.14456, 
           1.91974 0.58529 0.5145   3 0.20079, 
           1.80000 0.58065 0.5046   4 0.18307, 
           1.86020 0.62007 0.5711   5 0.18352, 
           1.88201 0.65575 0.6184   6 0.18847, 
           1.97018 0.72433 0.7113   7 0.20415, 
           2.08232 0.76838 0.7461   8 0.18847, 
           1.94062 0.69806 0.6981   9 0.17800, 
           1.98646 0.74679 0.7722  10 0.19979, 
           2.07987 0.79083 0.8557  11 0.21115, 
           2.28232 0.88462 0.9925  12 0.23453, 
           2.52779 0.95750 1.0877  13 0.20937, 
           2.62747 1.00285 1.1834  14 0.19843, 
           2.61235 0.99329 1.2565  15 0.18898, 
           2.52320 0.94857 1.2293  16 0.17203, 
           2.44632 0.97853 1.1889  17 0.18140, 
           2.56478 1.02591 1.2249  18 0.19431, 
           2.64588 1.03760 1.2669  19 0.19492, 
           2.69105 0.99669 1.2708  20 0.17912 };
 

The two-equation model in five parameters c_1, ... ,c_5 is

g_1 & = & c_110^{c_2z_4}[c_5z_1^{-c_4} +    (1-c_5)z_2^{-c_4}]^{-c_3/c_4} - z_3 = 0 \   g_2 & = & [\frac{c_5}{1-c_5}] ( \frac{z_1}{z_2}    )^{-1-c_4} -z_5 = 0

where the variables z_1 and z_2 are considered dependent (endogenous) and the variables z_3, z_4, and z_5 are considered independent (exogenous).

Differentiation of the two equations g_1 and g_2 with respect to the endogenous variables z_1 and z_2 yields the Jacobian matrix \partial g_i / \partial z_j for i=1,2 and j=1,2, where i corresponds to rows (equations) and j corresponds to endogenous variables (refer to Bard 1974). You must consider parameter sets for which the elements of the Jacobian and the logarithm of the determinant cannot be computed. In such cases, the function module must return a missing value. Here is the code:

  
    start fiml(pr) global(z); 
       c1 = pr[1]; c2 = pr[2]; c3 = pr[3]; c4 = pr[4]; c5 = pr[5]; 
      /* 1. Compute Jacobian */ 
       lndet = 0 ; 
       do t= 1 to 41; 
          j11 = (-c3/c4) * c1 * 10 ##(c2 * z[t,4]) * (-c4) * c5 * 
                z[t,1]##(-c4-1) * (c5 * z[t,1]##(-c4) + (1-c5) * 
                z[t,2]##(-c4))##(-c3/c4 -1); 
          j12 = (-c3/c4) * (-c4) * c1 * 10 ##(c2 * z[t,4]) * (1-c5) * 
                z[t,2]##(-c4-1) * (c5 * z[t,1]##(-c4) + (1-c5) * 
                z[t,2]##(-c4))##(-c3/c4 -1); 
          j21 = (-1-c4)*(c5/(1-c5))*z[t,1]##( -2-c4)/ (z[t,2]##(-1-c4)); 
          j22 = (1+c4)*(c5/(1-c5))*z[t,1]##( -1-c4)/ (z[t,2]##(-c4)); 
  
          j = (j11 || j12 ) // (j21 || j22) ; 
          if any(j = .) then detj = 0.; 
             else detj = det(j); 
          if abs(detj) < 1.e-30 then do; 
             print t detj j; 
             return(.); 
          end; 
          lndet = lndet + log(abs(detj)); 
       end;
 

Assuming that the residuals of the two equations are normally distributed, the likelihood is then computed as in Bard (1974). The following code computes the logarithm of the likelihood function:

  
      /* 2. Compute Sigma */ 
       sb = j(2,2,0.); 
       do t= 1 to 41; 
          eq_g1 = c1 * 10##(c2 * z[t,4]) * (c5*z[t,1]##(-c4) 
                  + (1-c5)*z[t,2]##(-c4))##(-c3/c4) - z[t,3]; 
          eq_g2 = (c5/(1-c5)) * (z[t,1] / z[t,2])##(-1-c4) - z[t,5]; 
          resid = eq_g1 // eq_g2; 
          sb = sb + resid * resid`; 
       end; 
       sb = sb / 41; 
      /* 3. Compute log L */ 
       const = 41. * (log(2 * 3.1415) + 1.); 
       lnds = 0.5 * 41 * log(det(sb)); 
       logl = const - lndet + lnds; 
       return(logl); 
    finish fiml;
 

There are potential problems in computing the power and log functions for an unrestricted parameter set. As a result, optimization algorithms that use line search fail more often than algorithms that restrict the search area. For that reason, the NLPDD subroutine is used in the following code to maximize the log-likelihood function:

  
    pr = j(1,5,0.001); 
    optn = {0 2}; 
    tc = {. . . 0}; 
    call nlpdd(rc, xr,"fiml", pr, optn,,tc); 
    print "Start" pr, "RC=" rc, "Opt Par" xr;
 

Part of the iteration history is shown in Output 11.7.1.

Output 11.7.1: Iteration History for Two-Equation ML Problem


Double Dogleg Optimization

Dual Broyden - Fletcher - Goldfarb - Shanno Update (DBFGS)

Without Parameter Scaling

Gradient Computed by Finite Differences

Parameter Estimates 5

Optimization Start
Active Constraints 0 Objective Function 909.72691311
Max Abs Gradient Element 41115.729089 Radius 1

Iteration   Restarts Function
Calls
Active
Constraints
  Objective
Function
Objective
Function
Change
Max Abs
Gradient
Element
Lambda Slope of
Search
Direction
1   0 2 0   85.24836 824.5 3676.4 711.8 -71032
2   0 7 0   45.14682 40.1015 3382.0 2881.2 -29.683
3   0 10 0   43.46797 1.6788 208.4 95.020 -3.348
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
35   0 64 0   -110.77858 5.68E-14 0.000111 41.795 -34E-17
36   1 101 0   -110.77858 5.68E-14 0.000119 4E12 -32E-20
36   2 145 0   -110.77858 0 0.000119 3.2E16 -46E-24

Optimization Results
Iterations 36 Function Calls 146
Gradient Calls 41 Active Constraints 0
Objective Function -110.7785811 Max Abs Gradient Element 0.0001186267
Slope of Search Direction -4.55096E-23 Radius 3.771173E-19



The results are very close to those reported by Bard (1974). Bard also reports different approaches to the same problem that can lead to very different MLEs.

Output 11.7.2: Parameter Estimates


Optimization Results
Parameter Estimates
N Parameter Estimate Gradient
Objective
Function
1 X1 0.583884 -0.000004817
2 X2 0.005882 0.000011377
3 X3 1.362817 -0.000003229
4 X4 0.475091 -0.000018103
5 X5 0.447072 0.000119

Value of Objective Function = -110.7785811



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