This paper proposes a formal model selection test for choosing between two competing structural econometric models. The procedure is based on a novel lack-of-fit criterion, namely, the
simulated mean squared error of predictions (SMSEP), taking into account the complexity of
structural econometric models. It is asymptotically valid for any fixed number of simulations, and allows for any estimator which has a √n
asymptotic normality or is superconsistent with a rate at n
. The test is bi-directional and applicable to non-nested models which are both possibly misspecified. The asymptotic distribution of the test statistic is derived. The proposed test is general regardless of whether the optimization criteria for estimation of competing models are the same as the SMSEP criterion used for model selection. An empirical application using timber auction data from Oregon is used to illustrate the usefulness and generality of the proposed testing procedure.
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