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Detecting neglected parameter heterogeneity with Chow tests

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  • Joachim Zietz

Abstract

The paper demonstrates through a number of Monte Carlo experiments that, for the type of cross-section data sets typically encountered in applied economics, Chow tests on sorted variations of the data matrix can detect neglected parameter heterogeneity. The paper focuses on heterogeneity in the behavioural responses of economic actors that belong to different economically meaningful groups, such as the young, middle-aged, and old. Since the suggested methodology is easy to implement yet powerful, its routine use by applied economists would be desirable given the very significant estimation bias that can result from neglecting parameter heterogeneity.

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File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/13504850500378759&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 13 (2006)
Issue (Month): 6 ()
Pages: 369-374

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Handle: RePEc:taf:apeclt:v:13:y:2006:i:6:p:369-374

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  1. Les Godfrey & Chris Orme, . "The Sensitivity of some General Checks to Omitted Variables in the Linear Model," Discussion Papers 92/3, Department of Economics, University of York.
  2. Hall, A.R., 1984. "The Information Matrix Test for the Linear Model," The Warwick Economics Research Paper Series (TWERPS) 250, University of Warwick, Department of Economics.
  3. Chesher, Andrew D, 1984. "Testing for Neglected Heterogeneity," Econometrica, Econometric Society, vol. 52(4), pages 865-72, July.
  4. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-94, September.
  5. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
  6. Russell Davidson & James G. MacKinnon, 1988. "A New Form of the Information Matrix Test," Working Papers 724, Queen's University, Department of Economics.
  7. Thursby, Jerry G., 1992. "A comparison of several exact and approximate tests for structural shift under heteroscedasticity," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 363-386.
  8. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. Chesher, Andrew & Spady, Richard, 1991. "Asymptotic Expansions of the Information Matrix Test Statistic," Econometrica, Econometric Society, vol. 59(3), pages 787-815, May.
  11. Zietz, Joachim, 2001. " Heteroskedasticity and Neglected Parameter Heterogeneity," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 263-73, May.
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Cited by:
  1. Isaksson, Ann-Sofie, 2008. "Social divisions and institutions: Assessing institutional parameter variation," Working Papers in Economics 282, University of Gothenburg, Department of Economics, revised 01 Aug 2008.

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