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Graphical diagnostics of endogeneity

In: Modelling and Evaluating Treatment Effects in Econometrics

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  • Xavier de Luna
  • Per Johansson

Abstract

We show that in sorting cross-sectional data, the endogeneity of a variable may be successfully detected by graphically examining the cumulative sum of the recursive residuals. Moreover, the sign of the bias implied by the endogeneity may be deducible through such graphs. In general, instrumental variables are needed to implement the graphical test. However, when a continuous or ordered (e.g. years of schooling) variable is suspected to be endogenous, a graphical test for misspecification due to endogeneity (e.g. self-selection) can be obtained without instrumental variables.

Suggested Citation

  • Xavier de Luna & Per Johansson, 2008. "Graphical diagnostics of endogeneity," Advances in Econometrics, in: Modelling and Evaluating Treatment Effects in Econometrics, pages 147-166, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(07)00006-0
    DOI: 10.1016/S0731-9053(07)00006-0
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