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Estimation and specification testing of panel data models with non-ignorable persistent heterogeneity, contemporaneous and intertemporal simultaneity and observable and unobservable dynamics

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  • Hajivassiliou, Vassilis

Abstract

This paper proposes efficient estimation methods for panel data limited dependent variables (LDV) models possessing a variety of complications: non-ignorable persistent heterogeneity; contemporaneous and intertemporal endogeneity; and observable and unobservable dynamics. An important problem handled by the novel framework of this paper involves contemporaneous and intertemporal simultaneity caused by social strategic interactive effects or contagion across economic agents over time. The paper first shows how a simple modification of estimators based on the Random Effects principle can preserve the consistency and asymptotic efficiency of the method in panel data despite non-ignorable persistent heterogeneity driven by correlations between the individual-specific component of the error term and the regressors. The approach is extremely easy to implement and allows straightforward classical and omnibus tests of the significance of such correlations that lie behind the non-ignorable persistent heterogeneity. The method applies to linear as well as nonlinear panel data models, static or dynamic. Two major extensions of the existing literature are that the method works for time-invariant as well as time-varying regressors, and that these dependencies may be non-linear functions of the regressors. The paper then combines this modified random effects approach with two simulationbased estimation strategies to overcome analytical as well as computational intractabilities in a widely applicable class of nonlinear models for panel data, namely the class of LDV models with contemporaneous and intertemporal endogeneity. The effectiveness of the estimation methods in providing asymptotically efficient estimates in such cases is illustrated with three discrete-response econometric models for panel data.

Suggested Citation

  • Hajivassiliou, Vassilis, 2019. "Estimation and specification testing of panel data models with non-ignorable persistent heterogeneity, contemporaneous and intertemporal simultaneity and observable and unobservable dynamics," LSE Research Online Documents on Economics 102843, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:102843
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    References listed on IDEAS

    as
    1. Hajivassiliou, Vassilis & Savignac, Frédérique, 2019. "Novel approaches to coherency conditions in dynamic LDV models: quantifying financing constraints and a firm's decision and ability to innovate," LSE Research Online Documents on Economics 102544, London School of Economics and Political Science, LSE Library.
    2. Jeffrey M. Wooldridge, 2005. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 39-54, January.
    3. Yannis M. Ioannides & Vassilis A. Hajivassiliou, 2007. "Unemployment and liquidity constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 479-510.
    4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    5. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
    6. Hajivassiliou, Vassilis & McFadden, Daniel & Ruud, Paul, 1996. "Simulation of multivariate normal rectangle probabilities and their derivatives theoretical and computational results," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 85-134.
    7. Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 225-238.
    8. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    9. Elisabetta Falcetti & Merxe Tudela, 2006. "Modelling Currency Crises in Emerging Markets: A Dynamic Probit Model with Unobserved Heterogeneity and Autocorrelated Errors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 445-471, August.
    10. Bo E. Honoré & Ekaterini Kyriazidou, 2000. "Panel Data Discrete Choice Models with Lagged Dependent Variables," Econometrica, Econometric Society, vol. 68(4), pages 839-874, July.
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    More about this item

    Keywords

    limited dependent variable models; simulation-based estimation; endogeneity; correlated random effects; initial conditions in nonlinear dynamic panel data models; strategic and social interaction; contagion;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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