Competing Models

61 Pages Posted: 23 Oct 2019

See all articles by José Luis Montiel Olea

José Luis Montiel Olea

Columbia University

Pietro Ortoleva

Princeton University - Department of Economics

Mallesh Pai

Rice University - Department of Economics

Andrea Prat

Columbia Business School - Finance and Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2019

Abstract

We develop a model in which different agents compete to predict a variable of interest. This variable is related to observables via an unknown data generating process. All agents are Bayesian, but may have 'misspecified models' of the world, i.e., they consider different subsets of observables to make their prediction. After observing a common dataset, who has the highest confidence in her predictive ability? We characterize it and show that it crucially depends on the size of the dataset. With big data, we show it is typically 'large dimensional,' possibly using more variables than the true model. With small data, we show (under additional assumptions) that it is an agent using a model that is 'small-dimensional,' in the sense of considering fewer covariates than the true data generating process. The theory is applied to auctions of assets where bidders observe the same information but hold different priors.

Suggested Citation

Montiel Olea, José Luis and Ortoleva, Pietro and Pai, Mallesh and Prat, Andrea, Competing Models (October 2019). CEPR Discussion Paper No. DP14066. Available at SSRN: https://ssrn.com/abstract=3474438

José Luis Montiel Olea (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Pietro Ortoleva

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Mallesh Pai

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

Andrea Prat

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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