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Identification and Estimation of Categorical Random Coeficient Models

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  • Gao, Z.
  • Pesaran, M. H.

Abstract

This paper proposes a linear categorical random coefficient model, in which the random coefficients follow parametric categorical distributions. The distributional parameters are identified based on a linear recurrence structure of moments of the random coefficients. A Generalized Method of Moments estimator is proposed, and its finite sample properties are examined using Monte Carlo simulations. The utility of the proposed method is illustrated by estimating the distribution of returns to education in the U.S. by gender and educational levels. We find that rising heterogeneity between educational groups is mainly due to the increasing returns to education for those with postsecondary education, whereas within group heterogeneity has been rising mostly in the case of individuals with high school or less education.

Suggested Citation

  • Gao, Z. & Pesaran, M. H., 2022. "Identification and Estimation of Categorical Random Coeficient Models," Cambridge Working Papers in Economics 2228, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2228
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    More about this item

    Keywords

    Random coefficient models; categorical distribution; return to education;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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