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New Wine in Old Bottles: A Sequential Estimation Technique for the LPM

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Author Info

  • Horrace, William C.

    () (Syracuse University)

  • Oaxaca, Ronald L.

    () (University of Arizona)

Abstract

The conditions under which ordinary least squares (OLS) is an unbiased and consistent estimator of the linear probability model (LPM) are unlikely to hold in many instances. Yet the LPM still may be the correct model or a good approximation to the probability generating process. A sequential least squares (SLS) estimation procedure is introduced that may outperform OLS in terms of finite sample bias and yields a consistent estimator. Monte Carlo simulations reveal that SLS outperforms OLS, probit and logit in terms of mean squared error of the predicted probabilities.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 703.

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Length: 34 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:iza:izadps:dp703

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Keywords: linear probability model; sequential least squares; consistency; Monte Carlo;

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  1. Rosenthal, Robert W, 1989. "A Bounded-Rationality Approach to the Study of Noncooperative Games," International Journal of Game Theory, Springer, vol. 18(3), pages 273-91.
  2. Currie, Janet & Gruber, Jonathan, 1996. "Health Insurance Eligibility, Utilization of Medical Care, and Child Health," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 431-66, May.
  3. Amemiya, Takeshi, 1977. "Some Theorems in the Linear Probability Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 645-50, October.
  4. Robert W. Fairlie & William A. Sundstrom, 1999. "The Emergence, persistence, and recent widening of the racial unemployment gap," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 52(2), pages 252-270, January.
  5. James J. Heckman & James M. Snyder, Jr., 1996. "Linear Probability Models of the Demand for Attributes with an Empirical Application to Estimating the Preferences of Legislators," NBER Working Papers 5785, National Bureau of Economic Research, Inc.
  6. Lukashin, Youri Pavlovich, 2000. " Econometric Analysis of Managers' Judgements on the Determinants of the Financial Situation in Russia," Economic Change and Restructuring, Springer, vol. 33(1-2), pages 85-101.
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Blog mentions

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  1. Another Gripe About the Linear Probability Model
    by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-06-01 16:11:00
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Cited by:
  1. Ross, Stephen L. & Zenou, Yves, 2004. "Shirking, Commuting and Labor Market Outcomes," Working Paper Series 627, Research Institute of Industrial Economics.
  2. Ross, Stephen L. & Zenou, Yves, 2008. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages based on Urban Economic Theory," CEPR Discussion Papers 6841, C.E.P.R. Discussion Papers.

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