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Abstract

Conventional Error Correction Models estimate the adjustment rate to all components of econometric errors. In this paper we estimate the response to a specific large error and investigate if the adjustment rate to a particular disequilibrium shock was distinct. We examine demand for leafy green vegetables, accounting for the 2006 U.S. Food and Drug Administration announcement that consumers should not eat spinach as it was a possible cause of an ongoing multi-state foodborne illness outbreak due to E-coli. If consumers initially responded to the government warning as if risks were significant but gradually realized that risk levels were negligible, the adjustment back to pre-announcement behavior could be considered a correction. Here, we develop a model of consumer behavior where consumers correct both for past errors and for any errors in their reaction to the shock. This method provides estimates of the rates of adjustment to the government announcement.

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