Identification by Disaggregation
Standard economic theory predicts that the actions of individuals in competitive markets have negligible effects on market-determined aggregates. Applied researchers incorrectly infer from this that market prices can be modeled as econometrically exogenous with respect to the quantity demanded of an...
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| Published in: | The American economic review 1985-12, Vol.75 (5), p.1165-1167 |
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| Main Authors: | , |
| Format: | Article |
| Language: | eng |
| Subjects: | |
| Online Access: | Get full text |
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| Summary: | Standard economic theory predicts that the actions of individuals in competitive markets have negligible effects on market-determined aggregates. Applied researchers incorrectly infer from this that market prices can be modeled as econometrically exogenous with respect to the quantity demanded of an individual consumer. This incorrect inference has even led some researchers to use an estimation strategy (called identification by disaggregation) that attempts to circumvent the simultaneity problem in a macro regression by disaggregating the dependent variable and estimating the relationship for individual agents or sectors. A simple proof is presented that estimates using disaggregated dependent variables suffer, on average, from the same degree of simultaneity bias as the estimates using aggregate data. It is concluded that identification by disaggregation is a strategy that succeeds only when it is unnecessary. |
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| ISSN: | 0002-8282 1944-7981 |