HENRI THEIL'S CONTRIBUTIONS TO ECONOMICS AND ECONOMETRICS Advanced Studies in Theoretical and Applied Econometrics Volume24
Managing Editors: A.J. Hughes Hallet, University of Strathclyde, Glasgow, United Kingdom J. Marquez, The Federal Reserve System, Washington, D.C., US.A.
Editorial Board: F.G. Adams, University of Pennsylvania, Philadelphia, US.A. P. Balestra, University of Geneva, Switzerland M.G. Dagenais, University of Montreal, Canada D. Kendrick, University of Texas, Austin, US.A. J.H.P. Paelinck, Netherlands Economic Institute, Rotterdam, The Netherlands R.S. Pindyck, Sloane School of Management, M.I. T., US.A. H. Theil, University of Florida, Gainesville, US.A. W. Welfe, University of Lodz, Poland
The titles published in this series are listed at the end of this vo/ume. Henri Theil's Contributions to Economics and Econometrics
Volume 11: Consumer Demand Analysis and Information Theory
Edited by Baldev Raj Wilfrid Laurier University, Water/oo, Ontario, Canada and Johan Koerts Erasmus University, Rotterdam, The Nether/ands
....
"SPRINGER SCIENCE+BUSINESS MED~ B.V. Library of Congress Cataloging-in-Publication Data (Revised for vol. 2) Henri Theil's contribution to economics and econometrics / edited by Baldev Raj, J. Koerts. p. cm. - (Advanced studies in theoretical and applie·' econometrics: V. 23, 24) Includes index. Contents: v. 1. Econometric theory and methodology. - v. 2. Consumer demand analysis and information theory. ISBN 978-94-010-5062-3 ISBN 978-94-011-2408-9 (eBook) DOI 10.1007/978-94-011-2408-9 1. Theil, Henri - Contributions to Econometrics. I. Theil, Henri. 11. Raj, Baldev, 1941- III. Koerts, J. IV. Series. HB139.H46 1991 330'01'5195 91-38183 ISBN 978-94-010-5062-3
Printed on acid-tree paper
All Rights Reserved © 1992 Springer Science+Business Media Dordrecht Originally published by K1uwer Academic Publishers in 1992 Softcover reprint cf the hardcover 1st edition 1992 as specified on appropriate pages within. No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, eleclronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner. DEDICATION
To
Eleonore Theil
Balbeer Raj
and
Maria Koerts Contents
CONTENTS OF THE COLLECTION
VOLUME I
PART ONE: INTRODUCTION AND OVERVIEW
Chapter 1 Henri Theil's Biography and his Contributions to Economics and Econometrics: An Overview Baldev Raj
Chapter 2 Professor Theil's Contribution to Economics Johan Koerts
Chapter 3 Theil's Citation Classics
1. Citation Classic: Economics andInformation Theory Henri Theil
2. Citation Classic: Preprinting Principles of Econometrics Henri Theil
3. Citation Classic: Econometric Research in the Early 1950s, Economic Forecasts and Policy Henri Theil
Chapter 4 Theil's Work History and Biographical Data
1. Present Position 2. Previous Positions 3. Education and Honours 4. Visiting and Other Appointments 5. Professional Societies 6. Editorial Activities 7. Dissertations Supervised
Appendix A Visitors (Guests): 1957 - 1991 Appendix B List of Names of Co-authors viii B. Raj and J. Koerts
Chapter 5 Theil's Annotated Bibliography
PART TWO: ECONOMETRIC THEORY AND METHODOLOGY
Section 2.1 Structural Equations
Chapter 6 Estimation and Simultaneous Correlation in Complete Equation Systems Henri Theil
Chapter 7 Estimation of Parameters of Econometric Models Henri Theil
Chapter 8 Some Recent Work of H. Theil on Estimation in Systems of Simultaneous Equations Roy Radner and Francis Bobkoski
Chapter 9 The Aggregation Implications of Identifiable Structural Macrorelations Henri Theil
Chapter 10 Three-Stage Least-Squares: Simultaneous Estimation of Simultaneous Equations Arnold Zellner and Henri Theil
Section 2.2 Systems of Equations
Chapter 11 A Multinomial Extension of the Linear Logit Model Henri Theil
Chapter 12 Recent Methodological Advances in Economic Equation Systems Henri Theil and Kenneth W. Clements
Chapter 13 Lp-Norm Estimation of Non-Linear Systems Henri Theil, Mercedes C. Rosa/sky, and Walter S. McManus Contents ix
Section 2.3 The Relationship Between Time Series Models and Econometric Models
Chapter 14 The Final Form of Econometric Equation Systems Henri Theil and J.e.G. Boot
Section 2.4 Measuring Expectations from Business Opinion Surveys
Chapter 15 Results of a Survey on Entrepreneurial Behaviour Patterns Henri Theil and W. van Schaik
Chapter 16 On the Time Shape of Economic Microvariables and the Munich Business Test Henri Theil
Chapter 17 Recent Experiences with the Munich Business Test: An Expository Article Henri Theil
Section 2.5 Mixed Statistical Estimation
Chapter 18 On Pure and Mixed Statistical Estimation in Economics Henri Theil and A.S. Goldberger
Chapter 19 Mixed Estimation Based on Quasi-Prior Judgments Henri Theil
Section 2.6 Multiple Regression Analysis
Chapter 20 A Rank-Invariant Method of Linear and Polynomial Regression Analysis, Parts I, II and III Henri Theil
Chapter 21 On the Efficiency of Wald's Method of Fitting Straight Lines Henri Theil and J. van IJzeren
Chapter 22 Multiplicative Randomness in Time Series Regression Analysis Henri Theil and LB.M. Mennes x B. Raj and J. Koerts
Chapter 23 A Simple Unimodal Lag Distribution Henri Theil and Robert Stern
Section 2.7 Analysis of Residuals and Tests for Regression Equations
Chapter 24 Estimates and their Sampling Variance of Parameters of Certain Heteroscedastic Distributions Henri Theil
Chapter 25 Specification Errors and the Estimation of Economic Relationships Henri Theil
Chapter 26 Testing the Independence of Regression Disturbances Henri Theil and A.L. Nagar
Chapter 27 The Analysis of Disturbances in Regression Analysis Henri Theil
Chapter 28 A Simplification of the BLUS Procedure for Analyzing Regression Disturbances Henri Theil
Section 2.8 Laitinen and Meisner: Simulations
Chapter 29 Why is Demand Homogeneity So Often Rejected? K. Laitinen
Chapter 30 The Sad Fate of the Asymptotic Slutsky Symmetry Test for Large Systems IP. Meisner
Section 2.9 Monte Carlo Tests
Chapter 31 Monte Carlo Testing in Systems of Equations Henri Theil, T.G. Taylor and I.S. Shonkwiler Contents xi
Section 2.10 Methodology
Chapter 32 A Reconsideration of the Keynes-Tinbergen Discussion on Econometric Techniques Henri Theil
Chapter 33 Some Developments of Economic Thought in the Netherlands Henri Theil
Index
VOLUME II
PART THREE: DEMAND ANALYSIS
Section 3.1 Three Early Papers
Chapter 34 Qualities, Prices and Budget Enquiries Henri Theil
Chapter 35 Substitution, Complementarity, and the Residual Variation Around Engel Curves Henri Theil and Heinz Neudecker
Chapter 36 The Information Approach to Demand Analysis Henri Theil
Section 3.2 Index Numbers
Chapter 37 Best Linear Index Numbers of Prices and Quantities Henri Theil
Chapter 38 On the Geometry and the Numerical Approximation of Cost of Living and Real Income Indices Henri Theil
Chapter 39 A New Index Number Formula Henri Theil xii B. Raj and J. Koerts
Section 3.3 Modelling the Disturbances in Demand Systems
Chapter 40 An Economic Theory of the Second Moments of Disturbances of Behavioral Equations Henri Theil
Chapter 41 A Theory of Rational Random Behavior Henri Theil
Section 3.4 The Econometrics of Demand Systems
Chapter 42 The Effect of Measurement Errors on the Estimation of Demand Systems Henri Theil
Chapter 43 The Two Perils of Symmetry-Constrained Estimation of Demand Systems Denzil Fiebig and Henri Theil
Chapter 44 A Simple and Efficient Estimation Method for a Non Linear Demand System Henri Theil. Baldev Raj, and Eric Diamond
Section 3.5 The Independence Transformation
Chapter 45 The Independence Transformation: A Review and Some Further Explorations Henri Theil and Kenneth Laitinen
Chapter 46 The Independence Transformation under Almost Additivity Henri Theil
PART FOUR: INFORMATION THEORY
Section 4.1 Demand Analysis
Chapter 47 Budget Share Transitions in the Netherlands, 1952-1977 Renate Finke and Henri Theil Contents xiii
Section 4.2 Economic Inequality and International Comparisons
Chapter 48 International Inequalities and General Criteria for Development Aid Henri Theil
Chapter 49 International Comparisons of Prices and Quantities Consumed Teun Kloek and Henri Theil
Chapter 50 Regional Per Capital Incomes and Income Inequalities: Point Estimates and Their Standard Errors Henri Theil and Yoram Friedman
Chapter 51 Inequality and Social Status in Successive Generations Henri Theil and Robert Stambaugh
Chapter 52 World Income Inequality and its Components Henri Theil
Chapter 53 The Development of International Inequality 1960-1985 Henri Theil
Section 4.3 Applications in Econometrics
Chapter 54 A Maximum Entropy Approach to the Specification of Distributed Lags Henri Theil and Denzil Fiebig
Chapter 55 Information-Theoretic Measures of Fit for Univariate and Multivariate Linear Regressions Henri Theil and Chiag-Fan Chung
Section 4.4 Input-Output Analysis
Chapter 56 Linear Aggregation in Input-Output Analysis Henri Theil
Chapter 57 The Information Approach to the Aggregation of Input Output Tables Henri Theil and Pedro Uribe xiv B. Raj and J. Koerts
Chapter 58 A Comparison of Shift-Share and the RAS Adjustment Henri Theil and Riddhi Ghosh
Section 4.5 Applications- in Business and Finance
Chapter 59 On the Use of Information Theory Concepts in the Analysis of Financial Statements Henri Theil
Section 4.6 Applications in Social Sciences
Chapter 60 The Desired Political Entropy Henri Theil
Chapter 61 A Note on the Measurement of Racial Integration of Schools by Means of Informational Concepts Henri Theil and Anthony Finizza
Index
VOLUME III
PART FIVE ECONOMIC POLICY AND FORECASTS
Section 5.1 Economic Policy
Chapter 62 Econometric Models and Welfare Maximization Henri Theil
Chapter 63 On the Theory of Economic Policy Henri Theil
Chapter 64 A Note on Certainty Equivalence in Dynamic Planning Henri Theil
Chapter 65 Macrodynamic Policy-Making: An Application of Strategy and Certainty Equivalence Concepts to the Economy of the United States, 1933-1936 PJ.M. van den Bogaard and Henri Theil Contents xv
Section 5.2 Forecasting
Chapter 66 Who Forecasts Best? Henri Theil
Chapter 67 A Statistical Appraisal of Postwar Macroeconomic Forecasts in the Netherlands and Scandinavia Henri Theil
Chapter 68 Some Observations on Adaptive Forecasting Henri Theil and S. Wage
Chapter 69 Forecast Evaluation Based on a Multiplicative Decomposition of Mean Square Errors Henri Theil and Myron Scholes
PART SIX: MANAGEMENT SCIENCE, OPERAnON RESEARCH AND QUANTITAnVE ANALYSIS
Section 6.1 Management Science
Chapter 70 Management Science in Europe Henri Theil
Chapter 71 Econometrics and Management Science: Their Overlap and Interaction Henri Theil
Section 6.2 Operations Research
Chapter 72 Quadratic Programming as an Extension of Classical Quadratic Maximization Henri Theil and C. van de Panne
Chapter 73 The Effect of Forecasting Errors on Optimal Programming Henri Theil and E. Kaptein
Chapter 74 Some Reflections on Static Programming under Uncertainty Henri Theil xvi B. Raj and J. Koerts
Chapter 75 A Procedure for Integer Maximization of a Definite Quadratic Function i.e.G. Boot and Henri Theil
Chapter 76 Substitution Effects in Geometric Programming Henri Theil
Section 6.3 Quantitative Analysis
Chapter 77 Quantitative Economics in the Netherlands J. Tinbergen and H. Theil
Chapter 78 On the Optimal Management of Research: A Mathematical Approach Henri Theil
Chapter 79 Can Economists Contribute to Marketing Research? Henri Theil
Chapter 80 The Cube Law Revisited Henri Theil
Chapter 81 The Apportionment Problem and the European Parliament Henri Theil and Linus Schrage
Index Preface xvii
PREFACE TO THE COLLECTION
PREAMBLE
The editors are pleased to present a selection of Henri Theil's contributions to economics and econometrics in three volumes. In Volume I we have provided an overview of Theil's contributions, a brief biography, an annotated bibliography of his research, and a selection of published and unpublished articles and chapters in books dealing with topics in econometrics. Volume II contains Theil's contributions to demand analysis and information theory. Volume III includes Theil's contributions in economic policy and forecasting, and management science. The selection of articles is intended to provide examples of Theil's many seminal and pathbreaking contributions to economics in such areas as econometrics, statistics, demand analysis, information theory, economic policy analysis, aggregation theory, forecasting, index numbers, management science, sociology, operations research, higher education and much more. The collection is also intended to serve as a tribute to him on the occasion of his 68th birthday: These three volumes also highlight some of Theil's contributions and service to the profession as a leader, advisor, administrator, teacher, and researcher. Theil's contributions, which encompass many disciplines, have been extensively cited both in scientific and professional journals. These citations often place Theil among the top 10 researchers (ranked according to number of times cited) in the world in various disciplines. This collection is not intended to provide a normative assessment of his pioneering and influential contributions or serve as a definitive statement on his lifetime of contributions. Furthermore, no attempt is made to provide a documented history of Theil's contribution to the development of the theory and application of econometrics or other disciplines. The collection merely provides the basic building blocks for a more detailed historical inquiry into his influence on the development of these disciplines. While we have made every attempt to include a significant number of his important contributions, some key contributions could not be included in the three volumes for a variety ofreasons. Firstly, we were faced with budget constraints; secondly some ofTheil's contributions are contained in books and reprinting them would have been impractical and expensive. The exclusion of some of these contributions is regrettable but could not be avoided.
I Theil's Fertschrift will also be published in 1991. It is entitled, Contributions to Consumer Demand and Econometrics and is jointly edited by R.F. Bewley and Tran Van Hoa (MacMillan Press). x.viii B. Raj and J. Koerts
ACKNOWLEDGEMENTS
The collection has benefited from the insights and comments of a large number of individuals. In addition, a number of our colleagues and friends have provided helpful suggestions and encouragement which made the task of editing these volumes (which took about two years to complete) quite enjoyable. We extend special thanks to Anton P. Barten, Kenneth W. Clements, Denzil G. Fiebig, Arthur S. Goldberger, Esfandiar Maasoumi, and Roy Radner who shared with us background material on Theil or commented on our initial selection. Helpful comments from Professor Henri Theil and two anonymous referees on our initial proposal led to additions and deletions to the list of included contributions. Their help is also gratefully acknowledged. We are also grateful to Peter Kennedy and Adolf Buse for their help in refereeing one of the unpublished articles and A.P. Barten and William E. Griffiths for supplying us with an English version of a paper from their personal libraries. In addition, it is a pleasure to thank all those who contributed in other ways to the completion of this project. This list includes Ronald Bewley, Jack Gould, John Kraft, Barry McPherson, Frank Millerd, Alex J. Murray, A.L. Nagar, Russell Muncaster, Tran Van Hoa, Alan Powell and John Weir. The editors are grateful to the following societies, associations, publishers, and individuals for their permission to reprint articles and chapters from journals and books. American Economic Association American Political Science Association American Statistical Association Cambridge University Press Econometric Society De Economist Elsevier Science Publishers and North Holland Publishers Gordon and Breach Science Publishers, Inc. H.E. Stenfert Kroese B.V. International Economic Review Institut de Statistique, Universire de Paris International Federation of Operational Research Societies Institute for Scientific Information Institute of Management Sciences International Statistical Institute JAI Press Journal of Accounting Research MacMillan Publishing Co. Maandschrift Economie Metroeconomica Netherlands Organization for International Co-operation in Higher Education Pergamon Press Ltd. Sage Publications Inc. Roy Radner Royal Netherlands Academy of Arts and Science Sloan Management Review Association Preface xix
Henri Theil Weltwirtschaftliches Archiv
FINANCIAL SUPPORT
This project was made possible by financial support or research assistance from a number of institutions which are listed below: Erasmus University (Faculty Development Fund) Wilfrid Laurier University (Academic Development Fund, Laurier Institute, and Research Office) McKethan-Matherly Chair of the University of Florida University of Chicago (Graduate School of Business) Inter-library Loans, Erasmus University and Wilfrid Laurier University Libraries Society of Management Accountants of Ontario
RESEARCH ASSISTANCE
The typing work was skilfully performed by the following individuals: Elli Hoek Van Dijke (Erasmus University) Elsie Grogan and Lori Kapshey (Word Processing Department, Wilfrid Laurier University) Andrew and Joan Zador (Science Scribe, Waterloo, Ontario) In addition, Trudy Trudel helped us with the typing of a few papers. The professional copy-editing of the manuscript (to bring it to a uniform style) as well as proof reading was performed by Dave Kroeker and Maura Brown. Margaret Forsyth, Tim Kuehn, Ildiko Tiswvszky, and Dr. C. Dubbelman provided competent research assistance including proofreading the retyped material. Gerry Anderson, Abby Brubacher and Chantel Thiel helped with library and secretarial tasks. The help of all these individuals is gratefully acknowledged. The acquisitions editor, Marie M. Stratta and her assistant Lorraine Jordens from Kluwer Academic Publishers were very helpful throughout the project; it has been a pleasure to work with them. This project would not have been completed without the support of Professor Henri Theil and our spouses Balbeer Raj and Maria Koerts. We thank them sincerely for their moral support.
Baldev Raj, Wilfrid Laurier University Waterloo, Ontario, Canada
Johan Koerts, Erasmus University, Rotterdam, The Netherlands Contents CONTENTS OF VOLUME II
Dedication v
Contents of the Collection Vll
Preface to the Collection xvii
PART THREE: DEMAND ANALYSIS
Section 3.1 Three Early Papers
Chapter 34 Qualities, Prices and Budget Enquiries 587 ljenri Theil
Source: Review ofEconomic Studies, 19 (1952-1953), 129-147.
Chapter 35 Substitution, Complementarity, and the Residual Variation 613 Around Engel Curves Henri Theil and Heinz Neudecker
Source: Review of Economic Studies, 25 flQ57-1958), 114-123.
Chapter 36 The Information Approach to Demand Analysis 627 Henri Theil
Source: Econometrica, 33 (1965), 67-87.
Section 3.2 Index Numbers
Chapter 37 Best Linear Index Numbers of Prices and Quantities 655 Henri Theil
Source: Econometrica, 28 (1960), 464-480.
Chapter 38 On the Geometry and the Numerical Approximation ofCost 675 of Living and Real Income Indices Henri Theil
Source: De Economist, 116 (1968),677-689. xxii B. Raj and J. Koerts
Chapter 39 A New Index Number Formula 689 Henri Theil
Source: Review of Economics and Statistics, SS (1973),498-502.
Section 3.3 Modelling the Disturbances in Demand Systems
Chapter 40 An Economic Theory of the Second Moments of 705 Disturbances of Behavioral Equations Henri Theil
Source: American Economic Review, 61 (1971), 190-194.
Chapter 41 A Theory of Rational Random Behavior 713 Henri Theil
Source: Journal ofthe American Statistical Association, 69 (1974), 310 314.
Section 3.4 The Econometrics of Demand Systems
Chapter 42 The Effect of Measurement Errors on the Estimation of 727 Demand Systems Henri Theil
Source: Economics Letters, 3 (1979), 373-376.
Chapter 43 The Two Perils of Symmetry-Constrained Estimation of 733 Demand Systems Denzil Fiebig and Henri Theil
Source: Economics Letters, 13 (1983), 105-111.
Chapter 44 A Simple and Efficient Estimation Method for a Non 741 Linear Demand System Henri Theil, Ba/dev Raj, and Eric Diamond
Source: Economics Letters, 20 (1986), 351-353. Contents xxiii
Section 3.5 The Independence Transformation
Chapter 45 The Independence Transformation: A Review and Some 747 Further Explorations Henri Theil and Kenneth Laitinen
Source: A.S. Deaton, ed., Essays in Theory and Management of Consumer Behavior, Cambridge Univ. Press, Cambridge (1981), 73-112.
Chapter 46 The Independence Transformation under Almost Additivity 793 Henri Theil
Source: Economics Letters, S (1980), 281-284.
PART FOUR: INFORMAnON THEORY
Section 4.1 Demand Analysis
Chapter 47 Budget Share Transitions in the Netherlands, 1952-1977 803 Renate Finke and Henri Theil
Source: Economics Letters, 16 (1984), 7-13.
Section 4.2 Economic Inequality and International Comparisons
Chapter 48 International Inequalities and General Criteria for 811 Development Aid Henri Theil
Source: International Economic Papers, 10 (1960), 42-63.
Chapter 49 International Comparisons of Prices and Quantities 837 Consumed Teun Kloek and Henri Theil
Source: Econometrica, 33 (1965), 535-556.
Chapter 50 Regional Per Capital Incomes and Income Inequalities: 863 Point Estimates and Their Standard Errors Henri Theil and Yo ram Friedman
Source: Journal ofthe American Statistical Association, 68 (1973), 531 539. xxiv B. Raj and J. Koerts
Chapter 51 Inequality and Social Status in Successive Generations 889 Henri Theil and Robert Stambaugh
Source: European Economic Review, 10 (1977), 125-139.
Chapter 52 World Income Inequality and its Components 905 Henri Theil
Source: Economics Leiters, 2 (1979), 99-102.
Chapter 53 The Development of International Inequality 1960-1985 909 Henri Theil
Source: Journal of Econometrics, 42 (1989), 145-155.
Section 4.3 Applications in Econometrics
Chapter 54 A Maximum Entropy Approach to the Specification of 923 Distributed Lags Henri Theil and Denzil Fiebig
Source: Economics Letters, 7 (1981), 339-342.
Chapter 55 Infonnation-Theoretic Measures of Fit for Univariate and 927 Multivariate Linear Regressions Henri Theil and Ching-Fan Chung
Source: American Statistician, 42 (1988), 249-252.
Section 4.4 Input-Output Analysis
Chapter 56 Linear Aggregation in Input-Output Analysis 939 Henri Theil
Source: Econometrica, 25 (1957), 111-122.
Chapter 57 The Infonnation Approach to the Aggregation of Input 955 Output Tables Henri Theil and Pedro Uribe
Source: Review of Economics and Statistics, 49 (1967), 451-462. Contents xxv
Chapter 58 A Comparison of Shift-Share and the RAS Adjustment 981 Henri Theil and Riddhi Ghosh
Source: Regional Science and Urban Economics, 10 (1980), 175-180.
Section 4.5 Applications in Business and Finance
Chapter 59 On the Use of Information Theory Concepts in the Analysis 991 of Financial Statements Henri Theil
Source: Management Science, IS (1969), 459-480.
Section 4.6 Applications in Social Sciences
Chapter 60 The Desired Political Entropy 1023 Henri Theil
Source: American Political Science Review, 63 (1969), 521-525.
Chapter 61 A Note on the Measurement of Racial Integration of 1033 Schools by Means of Informational Concepts Henri Theil and Anthony Finizza
Source: Journal of Mathematical Sociology, 1 (1971), 187-194.
Index 1041