The Generalized Price Equation

Matthijs van Veelen
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Matthijs van Veelen: University of Amsterdam

No 24-034/I, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The main ingredient of this paper is the derivation of the Generalized Price equation. This generalizes the original Price equation in the sense that it produces a set of Price-like equations, one for every different underlying model that one could assume has generated the data. All of these different Price-like equations are identities, and all of them only have a meaningful interpretation if the data are indeed generated by the model they presuppose. The criteria for choosing between these different Price-like equations are the exact same as the criteria that standard statistics uses when choosing the right statistical model, based on the data. The original Price equation in regression form is the generalized Price equation that goes with the simplest linear model. The problem with the widespread misuse of the Price equation is caused by the fact that it loses its meaning if the data are not generated by this model – in the same way that any of the other Price-like equations lose their meaning if the data are not generated by the model they presuppose.

JEL-codes: C73 (search for similar items in EconPapers)
Date: 2024-05-23
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