Paradox of identification, Game Theory

Discussion in the preceding section suggests that if we want to measure a given hnction belonging to a simultaneous-equations model, the hnction must be fairly stable over the sample period, that is, it must shift within a smaller range as compared with other relationships of the same model. In the last section we have shown that we can measure the supply function when it is fairly stable and the demand is shifting similarly we can measure the demand hnction if it is fairly stable while the supply hnction shows adequate variability. It can happen when the factor causing shift in one particular function is absent in another function. In other words, in order to identify the demand function, some factors absent from it but included in 'the supply function (or in other relations of the system) must be changing over the period of the sample.

Similarly, we can trace the supply function if it is fairly stable while demand shows enough variability. This implies that if the supply function is to be identified, some variables absent from it but affecting the demand function must be changing.

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