How to use economic theory to improve estimators: Shrinking toward theoretical restrictions

Fessler, Pirmin and Kasy, Maximilian ORCID: https://orcid.org/0000-0002-8679-5179 (2018) How to use economic theory to improve estimators: Shrinking toward theoretical restrictions. Review of Economics and Statistics. (Published before print)

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Abstract or Table of Contents

We propose to use economic theories to construct shrinkage estimators that perform well when the theories' empirical implications are approximately correct, but perform no worse than unrestricted estimators when the theories' implications do not hold. We implement this construction in various settings, including labor demand and wage inequality, and estimation of consumer demand. We provide asymptotic and finite sample characterizations of the behavior of the proposed estimators. Our approach is an alternative to the use of theory as something to be tested or to be imposed on estimates. Our approach complements uses of theory for identification and extrapolation.

Item Type: Article in Academic Journal
Classification Codes (e.g. JEL): JEL codes: C11, C52, J23, J31, D12
Research Units: in_Equality and Education
Status: Published before print
Date Deposited: 11 Dec 2018 10:47
Last Modified: 11 Dec 2018 10:47
URI: https://irihs.ihs.ac.at/id/eprint/4850

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