Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects

Jean-Louis Arcand and Béatrice d'Hombres

Working Papers from HAL

Abstract: When market structure is complete, factor demands by households will be independent of their characteristics, and households will take their production decisions as if they were profit-maximizing firms. This observation constitutes the basis for one of the most popular empirical tests for complete markets, commonly known as the "separation" hypothesis. In this article, we show that most existing tests for separation using panel data are potentially biased towards rejecting the null-hypothesis of complete markets, because of the failure to adequately control for unobservable household-specific effects. Since the variables on which the test for separation is based cannot be identifed in most panel datasets following the usual covariance transformations, and are likely to be correlated with the household-specific effect, neither the within nor the variance-components procedures are able to solve the problem. We show that the Hausman-Taylor 1981 estimator, in which the impact of covariates that are invariant along one dimension of a panel can be identifed through the use of covariance transformations of other included variables that are orthogonal to the household-specific effects as instruments, provides a simple solution. Our approach is applied to a rich Tunisian dataset in which separation –and thus the null of complete markets– is strongly rejected using the standard approach, but is not rejected once correlated unobservable household-specific effects are controlled for using the Hausman-Taylor instrument set.

Keywords: panel data; household-specific effects; Household models; testingfor incomplete markets; development microeconomics; Tunisia (search for similar items in EconPapers)
Date: 2011-01-18
New Economics Papers: this item is included in nep-agr
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00557188
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://shs.hal.science/halshs-00557188/document (application/pdf)

Related works:
Working Paper: Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects (2006)
Working Paper: Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:halshs-00557188

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD (hal@ccsd.cnrs.fr).