Transcription of “Structural vs. Reduced Form” - Yale University
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“Structural vs. Reduced Form” - Yale University
Structural vs. Reduced Form Language, confusion , and Modelsin Empirical EconomicsPhil HaileNovember 20211 Types of Empirical Economics?1. Measurement how much do prices change with the number of competitors? how has productivity ( , TFP) in the auto industrychanged over the last 30 years? what is the effect of college attendance on expected wage? what is the elasticity of demand for health insurance in MA?2. Model Testing is there moral hazard in auto insurance? does BNE explain bidding at oil auctions? do actual contracts resemble optimal contracts?3. Model Estimation for Counterfactuals how much would prices rise two firms merged? if the sales taxincreased by 1%? how would student outcomes differ under a different schoolchoice mechanism?2 Measurement vs. Model Estimation for Counterfactuals This distinction isusuallyfalse: Most measurement questions ineconomics concern a counterfactual of the form how would theworld have been different if XXX were changed, all else fixed?
Reduced Form: Another Source of Nuance and Confusion Definition.A reduced form is a functional or stochastic mapping for which the inputs are (i) exogenous variables and (ii) unobservables (“structural errors”), and for which the outputs are endogenous variables. e.g., Y = f …
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