Money and Markets: Essays in Honor of Leland B. Yeager

70 Steven B. Caudilland hypothesis testing. In these data-instigated papers, it is a certainty that the nullhypotheses will be rejected in favor of the alternative. After all, the high t-ratios arewhat spawned the paper in the first place. If researchers wish to use econometrics toreveal or inspire theories, I insist that they confess. For those working in the area ofpublic choice who are unwilling to test the data-instigated theories using differentdata sets, I suggest that the Empirical Results section be moved nearer to the frontof the paper and re-titled “Look What I Found.” Those working in theorychallengedsociology of economics should simply title their papers, “Look What IFound.”The PC approach to empirical researchWhat I have called the PC approach is really a method of conducting empiricalresearch which I associate with those working in the public choice area or havingpublic choice backgrounds, although examples can be found in all areas of economics.I have not scoured the literature for examples of this type of research. Myhope is that once the approach has been characterized, the articles will be easilyrecognized.PC empirical research is characterized by the following: (1) no structural modelis presented and may not exist; (2) many, if not all, of the variables in the model areproxy variables; (3) the estimation results may be the result of a proxy variablesearch; and (4) more efficient statistical approaches that are indicated by the data ormodel are not applied. 2 In fact, the list could probably be shortened to three characteristicsbecause, as I show, the fourth characteristic of the PC approach is largely aconsequence of the first three.1. No structural model. Economists are taught to think about the world in termsof constructs like supply and demand, production functions, and cost functions.Those adopting the PC approach may mention these constructs but they are neverformalized. No structural model is presented and may not exist. Instead, what thereader gets is something like a reduced form model, or what my colleague, RogerGarrison, calls a “pro forma reduced form model.” 3Econometricians tell us that when the reduced form model is derived from astructural model, one can still estimate regression coefficients, but interpreting theresults is nearly impossible. All that can be estimated is some function of the structuralcoefficients. This is the identification problem in econometrics. The situationin PC regressions is even worse because there may be nothing to identify. 4 A “proforma reduced form” is not derived from any structural model, so interpreting theresults is impossible.The absence of a structural model leads the researcher in the direction ofdata mining. This folly occurs because, without a structural model for guidance,researchers are more likely to try a “kitchen sink” approach to empirical research.One cannot appeal to a theory for help in determining the number and kind ofexplanatory variables to include in the regression model, so many variables are