Imposing Curvature and Monotonicity on Flexible Functional Forms: An Efficient Regional Approach
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In many areas of economic analysis, economic theory restricts the shape of functions. Examples are the monotonicity and curvature conditions that apply to utility, profit, and cost functions. Here we extend upon a currently available estimation method (Terrell, J Appl Econometr 11:179–194, 1996) for imposing regularity regionally on a connected subset of the regressor space. Our method offers important advantages by imposing theoretical consistency not only locally, at a given evaluation point but also within the whole empirically relevant region of the domain associated with the function being estimated. The method also provides benefits through higher flexibility, which generally leads to a better model fit to the sample data. Specific contributions of this paper are (a) to increase the computational speed, (b) to provide regularity preserving point estimates, and (c) to illustrate the benefits of this revised regional approach via numerical simulation results.
KeywordsNonlinear inequality constraints Flexible functional forms Metropolis-Hastings Accept–Reject algorithm Cost function Regularity conditions
JEL ClassificationC51 D21 C11
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