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Modified maximum likelihood estimation of Tobit models with fixed effects: theory and an application to earnings equations

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  • Gabriel Jiménez Zambrano

    (Banco de España)

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    Abstract

    This paper starts from the orthogonalization method proposed by Cox and Reid which is aplied to the Tobit model panel for data with fixed effects. Neyman and Scott showed that, generally, the maximum likelihood estimator is inconsistent (the incidental parameter problem). The methodology explained here recovers the use of the log-likelihood function to solve this problem taking advantage of the time-series dimension of panel data. For the Tobit model we show when is it possible to recover the orthogonal parameters, and study the characteristics of the estimators obtained with simulation methods. Also, an illustration for earnings equations has been performed.

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    Bibliographic Info

    Article provided by Fundación SEPI in its journal Investigaciones Economicas.

    Volume (Year): 29 (2005)
    Issue (Month): 3 (September)
    Pages: 575-607

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    Handle: RePEc:iec:inveco:v:29:y:2005:i:3:p:575-607

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    Related research

    Keywords: Orthogonal parameters; modified profile likelihood; panel data; Tobit model;

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    1. Heckman, James J & Macurdy, Thomas E, 1980. "A Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 47-74, January.
    2. Arellano, M. & Honore, B., 2000. "Panel Data Models: Some Recent Developments," Papers 0016, Centro de Estudios Monetarios Y Financieros-.
    3. Arellano, M., 2001. "Discrete Choices with Panel Data," Papers 0101, Centro de Estudios Monetarios Y Financieros-.
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