Falsifying economic models

A New Approach to Model Verification, Falsification and Selection

“…It has also appeared in a number of papers on qualitative analysis, e.g., Maybee and Weiner [27], Hale et al [9], Lady [28], and Buck and Lady [22]. In a qualitative context, the model was chosen to illustrate that for sufficiently sparse structural arrays (perhaps with other convenient features) entries in the reduced form would be signable due to adding a small number of (as called) "side conditions" on the relative values of some of the nonzero entries proposed for the structure.…”

“…The model is also presented in texts in industrial organization, e.g., Greer [19], Scherer and Ross [20], and Carlton and Perloff [21]. The model is also subjected to a qualitative analysis in Buck and Lady [22]. The model is expressed as βY = γZ, where the Y vector of endogenous variables has three entries: advertising divided by sales (Ad/S), concentration (C), and the price cost margin (M); and, the Z vector of exogenous variables has six entries: growth of the industry (Gr), a dummy for durable goods (Dur), minimum efficient scale divided by sales (MES/S), capital stock divided by sales (K/S), geographic …”

“…In Buck and Lady [22], 10 of the 18 entries of the reduced form could be signed assuming that β was a stable matrix (which meant that its inverse would have all negative entries). Given this, the analysis proceeded based upon traditional qualitative principles directed at the signs in the reduced form individually.…”

“…for γ12 indicates that the authors were not sure about this sign; and, for the analysis reported on here, this entry is set both positive and negative in the quantitative Monte Carlo repetitions, each about half the time. In Buck and Lady [22], the reduced form of the model was estimated using data derived from the 1992 Census of Manufacturers and the corresponding National Input-Output Tables. 20 The sign pattern of this result is:…”

Structural sign patterns and reduced form restrictions

“…5 Lady and Quirk (2007, 2010) showed that the LeChatelier Principle could be established based upon the sign pattern of β.6 Hale, et al (1999) reviews much of this literature. Additional citations are provided in the next section.7 Buck and Lady (2005) consider this problem using a traditional qualitative analysis and the stability hypothesis.…”