We describe identification conditions for dynamic discrete choice models that include unobserved state variables that are correlated across individuals and across time periods. The proposed framework extends the standard literature on the structural estimation of dynamic models by incorporating unobserved serially correlated common shocks. The shocks affect all individuals' static payoffs and the dynamic continuation payoffs associated with different decisions. We show conditions under which these aggregate shocks are identified using the variation in the observed aggregate behavior. The shocks and their transition are separately identified, provided there is enough cross-sectional variation of the observed states. We use the framework to estimate a model of mortgage default for a cohort of Colombian debtors between 1997 and 2004. Finally, we use the estimated model to study the effects on default of a class of policies and shocks that affected the evolution of mortgage balances in Colombia during the 1990's.
