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Testing regression monotonicity in econometric models

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  • Denis Chetverikov
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    Abstract

    Monotonicity is a key qualitative prediction of a wide array of economic models derived via robust comparative statics. It is therefore important to design eff ective and practical econometric methods for testing this prediction in empirical analysis. This paper develops a general nonparametric framework for testing monotonicity of a regression function. Using this framework, a broad class of new tests is introduced, which gives an empirical researcher a lot of flexibility to incorporate ex ante information she might have. The paper also develops new methods for simulating critical values, which are based on the combination of a bootstrap procedure and new selection algorithms. These methods yield tests that have correct asymptotic size and are asymptotically nonconservative. It is also shown how to obtain an adaptive rate optimal test that has the best attainable rate of uniform consistency against models whose regression function has Lipschitz-continuous fi rst-order derivatives and that automatically adapts to the unknown smoothness of the regression function. Simulations show that the power of the new tests in many cases signi ficantly exceeds that of some prior tests, e.g. that of Ghosal, Sen, and Van der Vaart (2000). An application of the developed procedures to the dataset of Ellison and Ellison (2011) shows that there is some evidence of strategic entry deterrence in pharmaceutical industry where incumbents may use strategic investment to prevent generic entries when their patents expire.

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    Bibliographic Info

    Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP35/12.

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    Date of creation: Nov 2012
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    Handle: RePEc:ifs:cemmap:35/12

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    1. Victor Chernozhukov & Sokbae 'Simon' Lee & Adam Rosen, 2011. "Intersection bounds: estimation and inference," CeMMAP working papers CWP34/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    2. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
    3. Miguel A. Delgado & Juan Carlos Escanciano, 2010. "Testing conditional monotonicity in the absence of smoothness," Economics Working Papers we1017, Universidad Carlos III, Departamento de Economía.
    4. Wolfgang HÄRDLE & A. TSYBAKOV, 1995. "Local Polynomial Estimators of the Volatility Function in Nonparametric Autoregression," SFB 373 Discussion Papers 1995,42, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    8. Joseph P. Romano & Azeem M. Shaikh, 2010. "Inference for the Identified Set in Partially Identified Econometric Models," Econometrica, Econometric Society, vol. 78(1), pages 169-211, 01.
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    11. Horowitz, Joel L & Spokoiny, Vladimir G, 2001. "An Adaptive, Rate-Optimal Test of a Parametric Mean-Regression Model against a Nonparametric Alternative," Econometrica, Econometric Society, vol. 69(3), pages 599-631, May.
    12. Robinson, Peter M, 1988. "Root- N-Consistent Semiparametric Regression," Econometrica, Econometric Society, vol. 56(4), pages 931-54, July.
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    14. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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