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Testing for the Monotone Likelihood Ratio Assumption

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Abstract

Monotonicity of the likelihood ratio for conditioned densities is a common technical assumption in economic models. But we have found no empirical tests for its plausibility. This paper develops such a test based on the theory of order-restricted inference, which is robust with respect to the correlation structure of the distributions being compared. We apply the test to study the technology revealed by agricultural production experiments. For the data under scrutiny, the results support the assumption of the monotone likelihood ratio. In a second application, we find some support for the assumption of affiliation among bids cast in a multiple-round Vickrey auction for a consumption good.

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  • Jutta Roosen & David A. Hennessy, 2003. "Testing for the Monotone Likelihood Ratio Assumption," Center for Agricultural and Rural Development (CARD) Publications 03-wp325, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    • Handle: RePEc:ias:cpaper:03-wp325
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    Cited by:

    1. Sangita Kulathinal & Isha Dewan, 2023. "Weighted U-statistics for likelihood-ratio ordering of bivariate data," Statistical Papers, Springer, vol. 64(2), pages 705-735, April.
    2. Jun, Sung Jae & Pinkse, Joris & Wan, Yuanyuan, 2010. "A consistent nonparametric test of affiliation in auction models," Journal of Econometrics, Elsevier, vol. 159(1), pages 46-54, November.
    3. Beare, Brendan K. & Shi, Xiaoxia, 2019. "An improved bootstrap test of density ratio ordering," Econometrics and Statistics, Elsevier, vol. 10(C), pages 9-26.
    4. Hanming Fang & Ami Ko, 2018. "Partial Rating Area Offering in the ACA Marketplaces: Facts, Theory and Evidence," PIER Working Paper Archive 18-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Oct 2018.
    5. Committee, Nobel Prize, 2020. "Improvements to auction theory and inventions of new auction formats," Nobel Prize in Economics documents 2020-2, Nobel Prize Committee.
    6. Richard T. Boylan, 2012. "The Effect of Punishment Severity on Plea Bargaining," Journal of Law and Economics, University of Chicago Press, vol. 55(3), pages 565-591.
    7. Isabell Goldberg & Jutta Roosen & Rodolfo M. Nayga, 2009. "Parental response to health risk information: experimental results on willingness‐to‐pay for safer infant milk formula," Health Economics, John Wiley & Sons, Ltd., vol. 18(5), pages 503-518, May.

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    More about this item

    Keywords

    affiliation; auction; likelihood ratio; order-restricted inference; stochastic order.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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