Dynamic binary outcome models with maximal heterogeneity
AbstractMost econometric schemes to allow for heterogeneity in micro behaviour have two drawbacks: they do not fit the data and they rule out interesting economic models. In this paper we consider the time homogeneous first order Markov (HFOM) model that allows for maximal heterogeneity. That is, the modelling of the heterogeneity does not impose anything on the data (except the HFOM assumption for each agent) and it allows for any theory model (that gives a HFOM process for an individual observable variable). `Maximal' means that the joint distribution of initial values and the transition probabilities is unrestricted. We establish necessary and sufficient conditions for the point identification of our heterogeneity structure and show how it depends on the length of the panel. A feasible ML estimation procedure is developed. Tests for a variety of subsidiary hypotheses such as the assumption that marginal dynamic effects are homogeneous are developed. We apply our techniques to a long panel of Danish workers who are very homogeneous in terms of observables. We show that individual unemployment dynamics are very heterogeneous, even for such a homogeneous group. We also show that the impact of cyclical variables on individual unemployment probabilities differs widely across workers. Some workers have unemployment dynamics that are independent of the cycle whereas others are highly sensitive to macro shocks.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we091710.
Date of creation: Feb 2009
Date of revision:
Discrete choice; Markov processes; Nonparametric identification; Unemployment dynamics;
Other versions of this item:
- Martin Browning & Jesus M. Carro, 2007. "Dynamic Binary Outcome Models with Maximal Heterogeneity," CAM Working Papers 2009-08, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Feb 2009.
- Browning, Martin & Carro, Jesús M., . "Dynamic binary outcome models with maximal heterogeneity," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3802, Universidad Carlos III de Madrid.
- Martin Browning & Jesus M. Carro, 2009. "Dynamic binary outcome models with maximal heterogeneity," Economics Series Working Papers 426, University of Oxford, Department of Economics.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-22 (All new papers)
- NEP-DCM-2009-03-22 (Discrete Choice Models)
- NEP-ECM-2009-03-22 (Econometrics)
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