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Testing for the Monotone Likelihood Ratio Assumption

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  • Roosen, Jutta
  • Hennessy, David A.

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. Keywords: affiliation, auction, likelihood ratio, order-restricted inference, stochastic order.

Suggested Citation

  • Roosen, Jutta & Hennessy, David A., 2003. "Testing for the Monotone Likelihood Ratio Assumption," Staff General Research Papers Archive 10193, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:10193
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    References listed on IDEAS

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    2. 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.
    3. 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.
    4. Beare, Brendan K. & Shi, Xiaoxia, 2019. "An improved bootstrap test of density ratio ordering," Econometrics and Statistics, Elsevier, vol. 10(C), pages 9-26.
    5. Hanming Fang & Ami Ko, 2018. "Partial Rating Area Offering in the ACA Marketplaces: Facts, Theory and Evidence," NBER Working Papers 25154, National Bureau of Economic Research, Inc.
    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. Nobel Prize Committee, 2020. "Improvements to auction theory and inventions of new auction formats," Nobel Prize in Economics documents 2020-2, Nobel Prize Committee.
    8. 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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    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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