Encompassing: Practical Applications Through Simulation

by Jean-Francois Richard, Robert C. Marshall, Chaohai Shen

Overview

An operational simulation-based implementation of a fundamental research principle in the sciences—the idea that a model must account for, or encompass, findings of alternative models.

To account for the universal deficiency of all economic models, Jean-François Richard, Robert Marshall, and Chaohai Shen propose in this book an operational test of whether a model accounts for—or encompasses—key results of alternative models. This simulation-based approach is distinct from the likelihood-based approach of forty-plus years ago. It is specifically designed to be applicable to serious nonlinear applications, under the minimal requirement that the models under consideration be amenable to Monte Carlo simulations.

The method of simulated moments, increasingly applied in major empirical applications, provides the ideal framework to compute a wide range of formal simulation-based encompassing test statistics. The authors argue that simulation-based encompassing is particularly easy to implement when the model of interest incorporates novel features relative to an earlier “benchmark” model: that is, “nests” the latter.

The book should be of particular interest to practitioners, researchers, and graduate students who wish to validate their models using simulation-based encompassing as a rigorous scientific alternative to more informal model comparisons.

Product Details

ISBN-13:	9780262384070
Publisher:	MIT Press
Publication date:	08/26/2025
Sold by:	Penguin Random House Publisher Services
Format:	eBook
Pages:	142
File size:	7 MB

About the Author

Jean-François Richard is a Belgian-American economist and Distinguished Professor of Economics at the University of Pittsburgh. He has been awarded the Prix des Alumni de la Fondation Universitaire, is a Fellow of the Econometric Society, and has published more than ninety articles and two books on a broad range of econometrics topics.

Robert C. Marshall is Distinguished Professor of Economics at Penn State University. He has published over thirty articles regarding bidder collusion and cartels and is the author, with Leslie M. Marx, of Economics of Collusion (MIT Press).

Chaohai Shen is Associate Professor of Economics at East China Normal University. His areas of research include economics of collusion, industrial organization, and applied econometrics.

Table of Contents

Preface
1 Introduction
2 Encompassing
3 Forecast Encompassing
4 Method of Simulated Moments (MSM)
5 Simulation Encompassing
6 Application to Bidder Collusion in Timber Auctions
7 Conclusion
Data Appendix
References
Index

What People are Saying About This

From the Publisher

“This is a magisterial text on encompassing, implemented by simulation for generality. Encompassing seeks to establish a model that can account for the results of competing explanations and render them redundant, thereby consolidating knowledge. The authors’ exceptional expertise shines through the clear discussions, derivations, and empirical application to the important issue of evaluating timber auctions. A must-read for econometricians by extending the theory and tools; for economists investigating auctions by providing a powerful method for analyzing empirical evidence; and for the legal profession by offering new ways of deciding if bidding rings are, or have been, operating."
—Sir David F. Hendry, Co-director of Climate Econometrics and Senior Research Fellow, Nuffield College

“The authors succeed brilliantly in producing a self-contained monograph that lays out a coherent framework to tackle a large number of important substantive issues. What I found most impressive is that while staying focused, the book covers a lot of ground and provides a very useful toolbox for empirical economists across the spectrum.”
—Antonio Merlo, President, Drexel University

“This book operationalizes the answer to the question of whether one model ‘encompasses’ another in a way that policy-oriented empiricists can easily implement, so long as the models are amenable to simulation. It is a must-read for empiricists who need to understand how their modeling assumptions affect policy conclusions.”
—Susan Athey, Professor of Economics, Stanford Graduate School of Business