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Generalized Rational Random Errors

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  • LaFrance, Jeffrey T.

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.

Suggested Citation

  • LaFrance, Jeffrey T., 2002. "Generalized Rational Random Errors," CUDARE Working Papers 25053, University of California, Berkeley, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:ucbecw:25053
    DOI: 10.22004/ag.econ.25053
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    1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    2. 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.
    3. Fuss, Melvyn & McFadden, Daniel (ed.), 1978. "Production Economics: A Dual Approach to Theory and Applications," Elsevier Monographs, Elsevier, edition 1, number 9780444850133.
    4. 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 190-194, March.
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