The Assessment of Market-Clearing as a Model Selection Problem

Shortages and surpluses appear in many markets both under exceptional and typical circumstances. This article proposes an assessment of the appropriateness of market-clearing in econometric modeling. The methodology allows the comparison of equilibrium and disequilibrium models with known likelihoods. Its performance is examined in a controlled environment using large-scale simulations of five market models. An application of the methodology using US retail and scanner deodorant data shows that, during times of distress, exogenous shocks can improve the effectiveness of the price mechanism. The results of this article may serve as empirical justifications of deviations from market-clearing.