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Competition: Specification, Estimation, and Mis-Specification

Опубликовано на портале: 22-12-2003
NBER Working Paper Series. 2002.  w9169.
Организация: National Bureau of Economic Research (NBER)
The difficulty of incorporating general equilibrium price effects into econometric estimating equations has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a paired-down CES monopolistic competition example, autors show that this difficulty has been greatly exaggerated. Along the way, we estimate indeed precisely estimate large welfare gains from trade liberalization as measured by compensating variation. Unlike calibration methods, econometric methods allow researchers to isolate the violence done by the model to the data. Autors find that the CES monopolistic competition model horribly mis-specifies behavioural price elasticities and general equilibrium price feedbacks. The model as conceived is therefore of limited value for analysing the effects of trade liberalization. Autors report a number of specification issues that should point the way to better theoretical modeling.

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