Encompassing: Practical Applications through Simulation

(Paperback)

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An operational simulation-based implementation of a fundamental research principle in the sciences-the idea that a model must account for, or encompass, findings of alternative models. An operational simulation-based implementation of a fundamental research principle in the sciences-the idea that a model must account for, or encompass, findings of alternative models. To account for the universal deficiency of all economic models, Jean-Fran ois Richard, Robert Marshall, and Chaohai Shen propose in this book an operational test of whether a model accounts for-or encompasses-key results of alternative models. This simulation-based approach is distinct from the likelihood-based approach of forty-plus years ago. It is specifically designed to be applicable to serious non-linear applications, under the minimal requirement that the models under consideration be amenable to Monte Carlo (MC) simulations. The Method of Simulated Moments (MSM), increasingly applied in major empirical applications, provides the ideal framework to compute a wide range of formal simulation-based encompassing test statistics. The authors argue that simulation-based encompassing is particularly easy to implement when the model of interest incorporates novel features relative to an earlier "benchmark" model, i.e., "nests" the latter. The book should be of particular interest to practitioners, researchers, and graduate students who wish to validate their models using simulation-based encompassing as a rigorous scientific alternative to more informal model comparisons.

Author Bio

Jean-Fran ois Richard is a Belgian-American economist and Distinguished Professor of Economics at the University of Pittsburgh. He has been awarded the Prix des Alumni de la Fondation Universitaire, is Fellow of the Econometric Society, and has published more than 90 articles and two books on a broad range of econometrics topics. Robert C. Marshall is Distinguished Professor of Economics at Penn State University. He has published over 30 articles regarding bidder collusion and cartels and, additionally, is the author, with Leslie M. Marx, of Economics of Collusion (MIT Press). Chaohai Shen is Associate Professor of Economics at East China Normal University. His areas of research include economics of collusion, industrial organization, and applied econometrics.