Chapter III explains and illustrates what it means for an economic theory to be empirically relevant. A theory’s empirical relevance depends on the empirical context in which it is tested and on the explication of empirical relevance. In present-day econometrics the empirical context of a test is determined by the characteristics of the data generating process. Also, the theory is empirically relevant if and only if the test gives the researcher no reason to reject the theory. In formal econometrics the empirical context of a test is determined by a probability distribution of the data - the MPD - that is induced by the probability distribution of the theory variables and the bridge principles. Also, the theory is empirically relevant if and only if there is a model of its axioms and a model of the bridge principles that determine a model of the MPD that belongs to a 95% confidence band around a meaningful statistical estimate of the MPD. Examples from experimental economics, consumer choice, simultaneous equations, and choice among safe and risky assets illustrate the contrasting characteristics of the notion of empirical relevance in present-day and formal econometrics.
Keywords: theory-data confrontations, upper data universe, lower data universe, empirical context, empirical relevance, data admissible MPD, experimental economics, consumer choice, simultaneous equations, safe and risky assets
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