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Is neglected heterogeneity really an issue in binary and fractional regression models? A simulation exercise for logit, probit and loglog models

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  • Esmeralda A. Ramalho

    ()
    (Universidade de Evora, Departamento de Economia, CEFAGE-UE)

  • Joaquim J. S. Ramalho

    ()
    (Universidade de Evora, Departamento de Economia, CEFAGE-UE)

Abstract

In this paper we examine theoretically and by simulation whether or not unobserved heterogeneity independent of the included regressors is really an issue in logit, probit and loglog models with both binary and fractional data. We found that unobserved heterogeneity: (i) produces an attenuation bias in the estimation of regression coefficients; (ii) is innocuous for logit estimation of average sample partial effects, while in the probit and loglog cases there may be important biases in the estimation of those quantities; (iii) has much more destructive effects over the estimation of population partial effects; (iv) only for logit models does not affect substantially the prediction of outcomes; and (v) is innocuous for the size and consistency of Wald tests for the significance of observed regressors but, in small samples, reduces their power substantially.

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Bibliographic Info

Paper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2009_10.

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Length: 31 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:cfe:wpcefa:2009_10

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Keywords: Binary models; fractional models; neglected heterogeneity; partial effects; prediction; wald tests.;

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  1. Chesher, Andrew & Peters, Simon, 1994. "Symmetry, Regression Design, and Sampling Distributions," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 10(01), pages 116-129, March.
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  7. J. S. Cramer, 2007. "Robustness of Logit Analysis: Unobserved Heterogeneity and Mis-specified Disturbances," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 69(4), pages 545-555, 08.
  8. Gourieroux,Christian, 2000. "Econometrics of Qualitative Dependent Variables," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589857.
  9. Yatchew, Adonis & Griliches, Zvi, 1985. "Specification Error in Probit Models," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 134-39, February.
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Cited by:
  1. Rahmouni, Mohieddine & Ayadi, Mohamed & YIldIzoglu, Murat, 2010. "Characteristics of innovating firms in Tunisia: The essential role of external knowledge sources," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 21(3), pages 181-196, August.

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