A Simple Distribution-Free Test for Nonnested Model Selection

Abstract

This paper considers a simple distribution-free test for nonnested model selection. The new test is shown to be asymptotically more efficient than the well-known Vuong test when the distribution of individual log-likelihood ratios is highly peaked. Monte Carlo results demonstrate that for many applied research situations, this distribution is indeed highly peaked. The simulation further demonstrates that the proposed test has greater power than the Vuong test under these conditions. The substantive application addresses the effect of domestic political institutions on foreign policy decision making. Do domestic institutions have effects because they hold political leaders accountable, or do they simply promote political norms that shape elite bargaining behavior? The results indicate that the latter model has greater explanatory power.