Methodological Issues in Analyzing Market Dynamics

43 Pages Posted: 22 Feb 2016

See all articles by Ariel Pakes

Ariel Pakes

National Bureau of Economic Research (NBER); Harvard University - Department of Economics

Date Written: February 2016

Abstract

This paper investigates progress in the development of models capable of empirically analyzing the evolution of industries. It starts with a parallel between the development of empirical frameworks for static and dynamic analysis of industries: both adapted their frameworks from models taken from economic theory. The dynamic framework has had its successes: it led to developments that have enabled us to control for dynamic phenomena in static empirical models and to useful computational theory. However when important characteristics of industries were integrated into that framework it generated complexities which both hindered empirical work on dynamics per se, and made it unrealistic as a model of agent behavior. This paper suggests a simpler alternative paradigm, one which need not maintain all the traditional theoretical restrictions, but does maintain the core theoretical idea of optimizing subject to an information set. It then discusses estimation, computation, and an example within that paradigm.

Suggested Citation

Pakes, Ariel, Methodological Issues in Analyzing Market Dynamics (February 2016). NBER Working Paper No. w21999. Available at SSRN: https://ssrn.com/abstract=2736075

Ariel Pakes (Contact Author)

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Harvard University - Department of Economics ( email )

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