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

Jean-Louis Arcand and Béatrice d'Hombres

MPRA Paper from University Library of Munich, Germany

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 paper, we show that all 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 individual effects. Since the variable on which the test for separation is based cannot be identifed in most panel datasets following the usual covariance transformations, and is 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; testing for incomplete markets; development microeconomics; Tunisia (search for similar items in EconPapers)
JEL-codes: C23 D13 D52 O12 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-agr and nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects (2011)
Working Paper: Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1863

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