Econometrica: Jul 2009, Volume 77, Issue 4
Testing Models With Multiple Equilibria by Quantile Methods
Federico Echenique, Ivana KomunjerThis paper proposes a method for testing complementarities between explanatory and dependent variables in a large class of economic models. The proposed test is based on the monotone comparative statics (MCS) property of equilibria. Our main result is that MCS produces testable implications on the (small and large) quantiles of the dependent variable, despite the presence of multiple equilibria. The key features of our approach are that (i) we work with a nonparametric structural model of a continuous dependent variable in which the unobservable is allowed to be correlated with the explanatory variable in a reasonably general way; (ii) we do not require the structural function to be known or estimable; (iii) we remain fairly agnostic on how an equilibrium is selected. We illustrate the usefulness of our result for policy evaluation within Berry, Levinsohn, and Pakes's (1999) model.
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