• Ariel Pakes
  • Elie Tamer


January 2021, Paper: "The idea that economic theory generates “inequalities” permeates modern economics. Its implications for empirical analysis appears at least as far back as the revealed preference theory of Samuelson (1938) who emphasized the ordinal nature of preferences and its relationship to consumer choice1 . Samuelson’s goal of connecting preferences to observed behavior through revealed preferences is one central theme of this paper. Because of the role of inequalities and optimizing behavior in economic theory, and the role of theory in directing both the questions and the forms of analysis in empirical work, it is difficult to give a comprehensive review of the literature that followed. Perhaps the earliest use of inequalities from theory to direct estimation in a context that is clearly relevant for Industrial Organization is in Marschak and Andrews (1944)’s analysis of production functions. They use inequalities derived through second order optimality conditions along with sign restrictions to constrain the parameters of the production function to regions of the parameter space2 . The Marschak and Andrews paper uses inequalities in the context of analyzing the implications of theory for choices of a continuous variable (second order conditions), whereas the literature since deals also with choice sets that have discreteness in them."

Non-HKS Author Websites - Ariel Pakes and Elie Tamer