Endogenous Variables in Binary Choice Models

Abstract

The main purpose of this article is to offer practical insights to econometricians wanting to estimate binary choice models featuring a continuous endogenous regressor. We use simulated data to investigate the performance of Lewbel’s special regressor method, an estimator that is relatively easy to implement and that relies on different identification conditions than more common control function and Maximum Likelihood estimators. Our findings confirm that the large support condition is crucial for the special regressor method to perform well and that one should be very cautious when implementing heteroscedasticity corrections and trimming since these could severely bias the final estimates.

Reference

Christophe Bontemps, and Céline Nauges, “Endogenous Variables in Binary Choice Models: Some Insights for Practitioners”, TSE Working Paper, n. 17-855, October 2017.