An Indirect Test for the Specification of Expectation Regimes

This paper develops an empirical strategy for testing competing hypothesis of expectation regimes when the direct measures of expectations are unavailable. The procedure takes as given an assumed structural relationship between expected values of exogenous variables and a given decision variable. By imposing different expectation regimes on this model, we obtain an artificial nesting of the hypothesized regimes which allows us to test whether any specification dominates. This methodology is extended to multiple equation applications with any number of hypothesized expectation regimes. The tests are illustrative using a model of the response of county-level farm acreage allocation to expected commodity prices.