# Structural Models in Econometrics

Structural modeling can be defined as complex mathematical models, algorithms, and statistical models that can correlate various data points and henceforth establish any correlation. It is generally used in predictive analytics as structural modeling can predict the change in the outcome of the model by varying specific parameters and its corresponding effect on the entire structure.

In econometrics, structural modeling is extensively used to study economic variables and how they can be fit into a model holistically. It helps to form causal as well as linear models and study both the time-varying and time-independent models. It plays a pivotal role in defining how any given outcome under certain boundary conditions relate to the behavior of the relevant economic variables can be determined using mechanisms. One of the critical gamut of structural modeling in econometrics is that it helps identify and develop tools that can give information about the economic variables and how they should be tweaked to serve the end goal of determining outcomes.

## Application of Structural Models

Structural modeling in econometrics is extensively used by policymakers to deal with unstructured data set. It is used to validate models, cleanse data, and quantify the impact of the given economic variables. It is used as a tool for empirical analysis by economists to study the changing economic variables. For example, structural modeling is used to determine the interaction between the demand and supply curve for any products. Demand for a product or service might depend upon factors like the price of the commodity, availability, cost of the substitutes, availability of the product, consumer behavior, etc. So based on such economic variables, we can develop a structural model to define the outcome. In our case, we can develop an architectural model that would give the percentage change in demand for a product or service if there is a fluctuation in its price while other things remain constant.

Another application of structural models is to bridge variables indirectly, which may not be related directly. For example, in the case of demand and supply, technological innovation might change the production pace. So, the tempo of production increases, more quantity of the goods can be produced. This would certainly lead to economies of scale, an important concept for market. However, there is high uncertainty that there is indeed the same demand to exploit this technological innovation. To go deeper, the consumers might not want to consume more of the product, and henceforth producing more of it might lead to diseconomies of scale rather than economies of scale. The technological innovation worth investing.

The questions of technological innovations can be answered by using structural models. It can help to predict demand over a while. Hence, using statistical requests, we can map the increased production to a reduction in prices, which can then be related to the firm's ability to change consumer behavior. Hence by using a statistical model for econometric analysis, an abstract or non-quantifiable variable can be used in a quantified manner. Furthermore, the structural model can also predict the shortcomings in the current scheme of things and suggest what other variables should be incorporated or altered to make the model more responsive comprehensively and holistically.

## Types of Structural Models

There are mainly four different types of structural models that are incorporated to study microeconomics. They are used for econometrics and research of economic fluctuations within markets.

### - Fully Specified Structural Models

It is used in econometric terms for a structural model to be fully determined. It should highlight all the explicit and time-bound assumptions about the economic variables and outline the economic environment and boundary constraint for each economic variable while specifying what role the variable plays in the given structural model.

Such models are used extensively in the labor economics of econometrics. The productivity of the labor vis-à-vis changes in the working environment, salary, and compensation, factor of prediction, etc. changes. As most of the variables are defined and have certain boundary conditions, it is easy to build a fully specified structural model that predicts how the laborers' productivity can be increased by making particular changes in the variables.

### - Partially Specified Structural Models

In the field of econometrics, these models are used when we focus on the behavior of an individual rather than the entire economic system. For example, in our previous case of labor productivity, suppose we are interested in finding out the richness of a particular employee. Hence, certain factors would be redundant for that individual employee or might not affect his productivity in a significant manner. Therefore, we can have a partial model to analyze his/her productivity patterns. This would lead to changes for that individual without concerning the microeconomic system.

### - Treatment Effect Models

This is probably the most important aspect of structural models in the field of econometrics. This is used to analyze events that have happened and impact or contribution of economic variables in that event. Hence such models help to gauge the cause of a game and how the same can be treated better. It works in a manner like suppose an event happened, how it could have been made better, what variables were significant and insignificant, which variables should be included, the probability of such events happening as planned, etc. Such questions are answered using the treatment effect model.

## Importance of Structural Models in Econometrics

To study the importance of structural models in econometrics, it is important to understand its correlation with labor productivity. With the example of labor productivity, the significance of structural models can be understood. Let us suppose, in ‘x’ month the productivity went down by y%. The management should analyze factors such as productivity loss due to compensation, lack of proper management or lack of appropriate inputs, etc. Such questions are analyzed and answered by building treatment effect models.

In econometrics, empirical analysis and detailed analysis form the backbone of any predictions. For an econometric to be accepted, it should incorporate all the economic variables and quantify each variable's effect in the final outcome. Structural modeling goes a long way in building such predictive, accurate, and responsive econometric models.

References:

https://pubs.aeaweb.org/doi/pdf/10.1257/jep.31.2.33

https://www.repository.cam.ac.uk/handle/1810/265073

1029 Words

Sep 17, 2020

3 Pages

Order Now