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The Wooldridge Method for the Initial Values Problem Is Simple: What About Performance?

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  • Akay, Alpaslan

    ()
    (University of Gothenburg)

Abstract

The Wooldridge method is based on a simple and novel strategy to deal with the initial values problem in the nonlinear dynamic random-effects panel data models. This characteristic of the method makes it very attractive in empirical applications. However, its finite sample performance is not known as of yet. In this paper we investigate the performance of this method in comparison with an ideal case in which the initial values are known constants, the worst scenario based on exogenous initial values assumption, and the Heckman's reduced-form approximation method which is widely used in the literature. The dynamic random-effects probit and tobit (type1) models are used as the working examples. Various designs of Monte Carlo Experiments with balanced and unbalanced panel data sets, and also two full length empirical applications are provided. The results suggest that the Wooldridge method works very well for the panels with moderately long durations (longer than 5-8 periods). In short panels Heckman's reduced-form approximation is suggested (shorter than 5 periods). It is also found that all methods perform equally well for panels of long durations (longer than 10-15 periods).

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3943.

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Length: 42 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:iza:izadps:dp3943

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Related research

Keywords: Monte Carlo experiment; Heckman's reduced-form approximation; dynamic probit and tobit models; Wooldridge method; initial values problem;

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Cited by:
  1. Konstantaras, Konstantinos & Siriopoulos, Costas, 2011. "Estimating financial distress with a dynamic model: Evidence from family owned enterprises in a small open economy," Journal of Multinational Financial Management, Elsevier, vol. 21(4), pages 239-255, October.
  2. Mosthaf, Alexander & Schank, Thorsten & Schnabel, Claus, 2009. "Low-wage employment versus unemployment: which one provides better prospects for women?," Discussion Papers 65, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  3. Stephen O'Neill & Kevin Hanrahan, 2010. "The importance of accounting for unobserved heterogeneity, state-dependence and differences in residual variances across groups: An application to Irish Farmers land market participation decisions," Working Papers 1005, Rural Economy and Development Programme,Teagasc.
  4. Peter Haan & Michal Myck, 2009. "Dynamics of Poor Health and Non-employment," SOEPpapers on Multidisciplinary Panel Data Research 195, DIW Berlin, The German Socio-Economic Panel (SOEP).
  5. Chrostek, Pawel, 2013. "An empirical investigation into the determinants and persistence of happiness and life evaluation," MPRA Paper 50442, University Library of Munich, Germany.
  6. Yin King Fok & Sung-Hee Jeon & Roger Wilkins, 2009. "Does Part-Time Employment Help or Hinder Lone Mothers Movements into Full-Time Employment?," Melbourne Institute Working Paper Series wp2009n25, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  7. Chrostek, Pawel, 2013. "An empirical investigation into the determinants and persistence of different types of subjective well-being," MPRA Paper 48292, University Library of Munich, Germany.
  8. Carlos Gradín & Olga Cantó, 2009. "Why are child poverty rates so persistently high in Spain?," Working Papers 123, ECINEQ, Society for the Study of Economic Inequality.
  9. Giarda, Elena, 2013. "Persistency of financial distress amongst Italian households: Evidence from dynamic models for binary panel data," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3425-3434.
  10. Wunder, Christoph & Riphahn, Regina T., 2011. "The dynamics of welfare entry and exit among natives and immigrants," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 49162, Verein für Socialpolitik / German Economic Association.
  11. Peter Haan & Katharina Wrohlich, 2009. "Can Child Care Policy Encourage Employment and Fertility?: Evidence from a Structural Model," Discussion Papers of DIW Berlin 935, DIW Berlin, German Institute for Economic Research.
  12. Haan, Peter & Myck, Michal, 2009. "Dynamics of health and labor market risks," Journal of Health Economics, Elsevier, vol. 28(6), pages 1116-1125, December.

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