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Testable implications of general equilibrium models: an integer programming approach

  • Laurens CHERCHYE
  • Thomas DEMUYNCK
  • Bram DE ROCK

Focusing on the testable implications on the equilibrium manifold, we show that the rationalizability problem is NP-complete. Subsequently, we present an integer programming (IP) approach to characterizing general equilibrium models. This approach avoids the use of the Tarski-Seidenberg algorithm for quantifier elimination that is commonly used in the literature. The IP approach naturally applies to settings with any number of observations, which is attractive for empirical applications. In addition, it can easily be adjusted to analyze the testable implications of alternative general equilibrium models (that include, e.g., public goods, externalities and/or production). Further, we show that the IP framework can easily address recoverability questions (pertaining to the structural model that underlies the observed equilibrium behavior), and account for empirical issues when bringing the IP methodology to the data (such as goodness-of-fit and power). Finally, we show how to develop easy-to-implement heuristics that give a quick (but possibly inconclusive) answer to whether or not the data satisfy the general equilibrium models.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces09.14.

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Date of creation: Jul 2009
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Handle: RePEc:ete:ceswps:ces09.14
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  1. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 99-110.
  2. Donald J. Brown & Rosa L. Matzkin, 1995. "Testable Restrictions on the Equilibrium Manifold," Cowles Foundation Discussion Papers 1109, Cowles Foundation for Research in Economics, Yale University.
  3. Kubler, Felix, 2003. "Observable restrictions of general equilibrium models with financial markets," Journal of Economic Theory, Elsevier, vol. 110(1), pages 137-153, May.
  4. Cherchye, Laurens & Demuynck, Thomas & De Rock, Bram, 2011. "Testable implications of general equilibrium models: An integer programming approach," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 564-575.
  5. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2011. "The revealed preference approach to collective consumption behavior: nonparametric testing and sharing rule recovery," ULB Institutional Repository 2013/98560, ULB -- Universite Libre de Bruxelles.
  6. Fabrice Talla Nobibon & Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frits C.R. Spieksma, 2008. "Heuristics for deciding collectively rational consumption behavior," Center for Economic Studies - Discussion papers ces0824, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  7. Donald J. Brown & Caterina Calsamiglia, 2005. "The Nonparametric Approach to Applied Welfare Analysis," Cowles Foundation Discussion Papers 1507, Cowles Foundation for Research in Economics, Yale University.
  8. John Quah & Andres Carvajal, 2009. "A Nonparametric Analysis of the Cournot Model," Economics Series Working Papers 465, University of Oxford, Department of Economics.
  9. Carvajal, Andres, 2004. "Testable restrictions on the equilibrium manifold under random preferences," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 121-143, February.
  10. Deb, Rahul, 2009. "A testable model of consumption with externalities," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1804-1816, July.
  11. Carvajal, Andres & Ray, Indrajit & Snyder, Susan, 2004. "Equilibrium behavior in markets and games: testable restrictions and identification," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 1-40, February.
  12. P.A. Chiappori & I. Ekeland & F. Kubler & H.M. Polemarchakis, 2002. "Testable Implications of General Equilibrium Theory: a differentiable approach," Working Papers 2002-10, Brown University, Department of Economics.
  13. repec:oup:restud:v:78:y:2011:i:1:p:176-198 is not listed on IDEAS
  14. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  15. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 419-425.
  16. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 419-425.
  17. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  18. Ruediger Bachmann, 2006. "Testable Implications of Pareto Efficiency and Individualrationality," Economic Theory, Springer, vol. 29(3), pages 489-504, November.
  19. Snyder, Susan K., 1999. "Testable restrictions of Pareto optimal public good provision," Journal of Public Economics, Elsevier, vol. 71(1), pages 97-119, January.
  20. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  21. Cherchye, L.J.H. & de Rock, B. & Vermeulen, F.M.P., 2011. "The revealed preference approach to collective consumption behavior : Testing and sharing rule recovery," Other publications TiSEM 11c788ab-cf82-4759-a6a8-3, Tilburg University, School of Economics and Management.
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