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Endogeneity Testing in a Supply and Demand Framework

Walter N. Thurman
The Review of Economics and Statistics
Vol. 68, No. 4 (Nov., 1986), pp. 638-646
Published by: The MIT Press
DOI: 10.2307/1924523
Stable URL: http://www.jstor.org/stable/1924523
Page Count: 9
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Endogeneity Testing in a Supply and Demand Framework
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Abstract

The powers of Wu-Hausman endogeneity tests are related to the normalization decision in estimating demand equations. Power is not invariant to the choice between quantity and price as the dependent variable. A theoretical result due to Nakamura and Nakamura (1983) is used to explore the dependence of power on parameters of the supply and demand system. The theoretical result is corroborated with a Monte Carlo experiment. The power results are used to analyze the U.S. demand for poultry meat wherein price, but not quantity, is found to be predetermined.

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