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Testing instrument validity in sample selection models

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  • Huber, Martin
  • Mellace, Giovanni

Abstract

This paper proposes tests for instrument validity in sample selection models with non-randomly censored outcomes. Such models commonly invoke an exclusion restriction (i.e., the availability of an instrument affecting selection, but not the outcome) and additive separability of the errors in the selection process. These assumptions allow us to both point identify and bound the outcome distribution of the subpopulation of the always selected, whose outcomes are observed irrespective of the instrument value. As the point must lie within its bounds, this yields two testable inequality constraints. We apply our tests to two instruments conventionally exploited for the estimation of female wage equations: non-wife/husband's income and the number of (young) children. Considering eight empirical applications, our results suggest that the former is not a valid instrument, while the validity of the latter is not refuted on statistical grounds.

Suggested Citation

  • Huber, Martin & Mellace, Giovanni, 2011. "Testing instrument validity in sample selection models," Economics Working Paper Series 1145, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2011:45
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1145.pdf
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    More about this item

    Keywords

    Sample selection; instrument; test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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