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Generalized rational random errors

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  • LaFrance, Jeffrey T

    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

Abstract

Theil's theory of rational random errors is sufficient for strict exogeneity of group expenditure in separable demand models. Generalized rational random errors is necessary and sufficient for strict exogeneity of group expenditure. A simple, robust, asymptotically normal t-test of this hypothesis is derived based on the generalized method of moments. An application to per capita annual U.S. food demand in the 20th century strongly rejects exogeneity of food expenditure in a model that in all other respects is highly compatible with the data set and with the implications of economic theory.

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 938.

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Length: 27 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:are:cudare:938

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Related research

Keywords: bayesian method of moments consumers' demand; entropy; error analysis; food consumption;

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References

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  1. Theil, Henri, 1971. "An Economic Theory of the Second Moments of Disturbances of Behavioral Equations," American Economic Review, American Economic Association, vol. 61(1), pages 190-94, March.
  2. W. Erwin Diewert & T.J. Wales, 1989. "Flexible Functional Forms and Global Curvature Conditions," NBER Technical Working Papers 0040, National Bureau of Economic Research, Inc.
  3. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
  4. Edgerton, David L., 1993. "On The Estimation Of Separable Demand Models," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(02), December.
  5. Theil, Henri, 1975. "The theory of rational random behavior and its application to demand analysis," European Economic Review, Elsevier, vol. 6(3), pages 217-226, July.
  6. Jeffrey T. LaFrance & W. Michael Hanemann, 1989. "The Dual Structure of Incomplete Demand Systems," Development Research Unit Working Paper Series archive-21, Monash University, Department of Economics.
  7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  8. Pollak, Robert A & Wales, Terence J, 1981. "Demographic Variables in Demand Analysis," Econometrica, Econometric Society, vol. 49(6), pages 1533-51, November.
  9. Brown, Bryan W & Walker, Mary Beth, 1989. "The Random Utility Hypothesis and Inference in Demand Systems," Econometrica, Econometric Society, vol. 57(4), pages 815-29, July.
  10. LaFrance, Jeffrey T., 1985. "Linear demand functions in theory and practice," Journal of Economic Theory, Elsevier, vol. 37(1), pages 147-166, October.
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