"Methods of Estimation for Markets in Disequilibrium," (with D. M. Jaffee), Econometrica, 1972.Paper: pdf file
This paper is concerned with the econometric problems associated with estimating supply and demand schedules in disequilibrium markets. The general problem is that in the absence of an equilibrium condition the ex ante demand and supply quantities cannot in general be equated to the observed quantity traded in the market. Four methods of estimation, differing primarily in their use of information on price-setting behavior, are developed in this paper. The first method is a generalization of an earlier method developed by R. Quandt and is based upon the maximization of a likelihood function. The method does not require any specific assumption about price-setting behavior, and it allows the sample separation (into demand and supply regimes) to be estimated along with the coefficient estimates. The second and third methods use the change in price as a qualitative proxy in determining the sample separation. The fourth method uses the change in price as a quantitative proxy for the amount of excess demand (supply) in the market. In the final section of the paper the four methods are used to estimate a model of the housing and mortgage market in an effort to gauge the potential usefulness of each of the methods.
This paper led to a fairly large literature on "disequilibrium" econometrics. On request I distributed the housing data used in this paper to many others, and many of the examples in the literature are based these data. My other paper in this area (with H.H. Kelejian) is 1974#2. Also, the model of housing starts in this paper was part of my forecasting model--see Chapter 8 in 1971#5.