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A Computationally Practical Simulation Estimation Algorithm for Dynamic Panel Data Models with Unobserved Endogenous State Variables

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Author Info
Keane, Michael P. () (University of Technology, Sydney)
Sauer, Robert M. () (University of Bristol)

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Abstract

This paper develops a simulation estimation algorithm that is particularly useful for estimating dynamic panel data models with unobserved endogenous state variables. The new approach can easily deal with the commonly encountered and widely discussed "initial conditions problem," as well as the more general problem of missing state variables during the sample period. Repeated sampling experiments on dynamic probit models with serially correlated errors indicate that the estimator has good small sample properties. We apply the estimator to a model of married women's labor force participation decisions. The results show that the rarely used Polya model, which is very difficult to estimate given missing data problems, fits the data substantially better than the popular Markov model. The Polya model implies far less state dependence in employment status than the Markov model. It also implies that observed heterogeneity in education, young children and husband income are much more important determinants of participation, while race is much less important.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4054.

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Date of creation: Mar 2009
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Publication status: forthcoming in: International Economic Review
Handle: RePEc:iza:izadps:dp4054

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Related research
Keywords: simulation; missing data; initial conditions; female labor force participation;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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  1. Michael P. Keane & Kenneth I. Wolpin, 2006. "The Role of Labor and Marriage Markets, Preference Heterogeneity and the Welfare System in the Life Cycle Decisions of Black, Hispanic and White Women," PIER Working Paper Archive 06-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  2. Antonio Merlo & Kenneth I. Wolpin, 2008. "The Transition from School to Jail: Youth Crime and High School Completion Among Black Males," PIER Working Paper Archive 08-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  3. Michael P. Keane & Robert M. Sauer, 2006. "Classification Error in Dynamic Discrete Choice Models: Implications for Female Labor Supply Behavior," IZA Discussion Papers 2332, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Murat G. Kirdar, 2005. "Return Migration and Saving Behavior of Foreign Workers in Germany," ERC Working Papers 0506, ERC - Economic Research Center, Middle East Technical University, revised Nov 2005. [Downloadable!]
  5. Murat G. Kirdar, 2004. "An Estimable Dynamic Model of Asset Accumulation and Return Migration," ERC Working Papers 0416, ERC - Economic Research Center, Middle East Technical University, revised Dec 2004. [Downloadable!]
  6. Antonio Merlo & Kenneth I. Wolpin, 2008. "The Transition from School to Jail: Youth Crime and High School Completion Among Black Males, Second Version," PIER Working Paper Archive 09-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 16 Jan 2009. [Downloadable!]
  7. Kirdar, Murat G., 2008. "Estimating the impact of immigrants on the host country social security system when return migration is an endogenous choice," MPRA Paper 7803, University Library of Munich, Germany. [Downloadable!]
  8. Daniela Del Boca & Robert M. Sauer, 2006. "Life Cycle Employment and Fertility Across Institutional Environments," Carlo Alberto Notebooks 20, Collegio Carlo Alberto. [Downloadable!]
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