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I hope this is the place to ask this question. I am in the first year of PhD in economics. As most of PhD students in economics, I try to show some economic mechanisms by theoretical modelling in environmental economics.

Most of time, I have a tendency to base largely on other models in the literature. I try to incorporate my idea in existing models but it does not work really well. For those who are in economics, how do you start to model your idea ? Do you start from a really basic model and complexify after ?

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  • $\begingroup$ This is an interesting question and definitely belongs to this site. But the members of the community who are voting to close it as "too broad" are right: it matters a lot in what sub-field of economics does your PhD lives, whether it is intended to be mainly theoretical or mainly empirical, what kind of "empirical" are we talking about, etc. A useful answer would change as answers to the above clarifications change. There is no need to tell us your specific idea, just the theoretical and methodological framework into which you are working. $\endgroup$ – Alecos Papadopoulos Apr 12 '15 at 20:31
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Always use smaller models when you can. Typically, you want to show that

  • surprisingly/interestingly, if we combine A,B in a model, there is an interaction that explains C.

Have the smallest model that you need to make your point (that contains A,B). Additional features are irrelevant to make your point and will only distract you and your audience.

There are many models which are famous for being able to model A, B, or similar. If you need A and C, take a model famous for being good at modeling A, and add feature C. If there is nothing clean (any model that has A, also has A2, A3, A4 - which you really don't need), you might be better off writing your own model / simplifying an existing one).

Example

For example,

  • A: Monopolistic competition is a nice way to have firms with positive profit margins
  • B: The Calvo-fairy is one way of getting sticky prices in an equilibrium model

If you combine A,B (and a few other basic elements), you can interestingly show an environment with room for monetary policy, the standard NK-model.

Say you want to look at the impact of sticky prices onto unemployment. You could take A,B and add sticky wages and monopolistic competition on the labor supply side. Or, you could start with the Diamonds-Mortensen-Pissarides (DMP) model and extend it with B.

The choice of model depends particularly on

  • Which is the easier choice (certainly the first one)
  • What is the mechanism you're interested in?

If you believe that workers really are setting the wage and there is some stickiness in their ability to do so, (i) is the way to go. If you believe it is important that employment comes after some matching-period, and wages are set through bargaining from both employers and employees, extending DMP would be a better way.

Fundamentally, if you believe that you could use DMP, but it has some clutter that you don't need, get rid of that first, and then add your price-stickiness.

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Hal Varian's "How to Build an Economic Model in Your Spare Time" has some excellent advice on this topic.

The best advice echoes what FooBar has alrady said. Start with the simplest possible model: two agents, two actions, two periods. Not only does this help to keep the model clean, it also helps you to understand the most fundamental aspects of the mechanism driving your results. If you really have an intuitive story to tell, you should be able to figure out what are the absolute minimum necessary ingredients to make it work. Also, because of the lack of 'moving parts', the simpliest model will probably yield the most robust version of your results.

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You can always keep in mind the motto of Paul Krugman for his modelling style which is "KISS" (keep it simple and stupid). It is also the recommendation of Hal Varian as mentionned by Ubiquitous. You can start by a simple model and work on it in order to understand the mechanism in your simple model after that you could add some other stuff on it according to your idea.

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