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Duration Dependence and Nonparametric Heterogeneity: A Monte Carlo Study

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Author Info
Michael Baker
Angelo Melino

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Abstract

We examine the behaviour of the nonparametric maximum likelihood estimator (NPMLE) for a discrete duration model with unobserved heterogeneity and unknown duration dependence. We find that a nonparametric specification of either the duration dependence or unobserved heterogeneity, when the other feature of the hazard is known to be absent, leads to estimators that are well behaved even in modestly sized samples. In contrast, there is a large and systematic bias in the parameters of these components when both are specified nonparametrically, as well as a complementary bias in the coefficients on observed heterogeneity. Furthermore, these biases diminish very gradually as sample size increases. We find that a minor modification of the quasilikelihood that penalizes specifications with many points of support leads to a dramatic improvement.

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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number melino-99-01.

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Length: 43 pages
Date of creation: 14 Jun 1999
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Handle: RePEc:tor:tecipa:melino-99-01

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Related research
Keywords: Duration model; unobserved heterogeneity; NPMLE;

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Find related papers by JEL classification:
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
J1 - Labor and Demographic Economics - - Demographic Economics

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  1. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April. [Downloadable!] (restricted)
  2. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March. [Downloadable!] (restricted)
  3. Huh, Keun & Sickles, Robin C, 1994. "Estimation of the Duration Model by Nonparametric Maximum Likelihood, Maximum Penalized Likelihood, and Probability Simulators," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 683-94, November. [Downloadable!] (restricted)
  4. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July. [Downloadable!] (restricted)
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  5. Sin, Chor-Yiu & White, Halbert, 1996. "Information criteria for selecting possibly misspecified parametric models," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 207-225. [Downloadable!] (restricted)
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  6. Gunderson, Morley & Melino, Angelo, 1990. "The Effects of Public Policy on Strike Duration," Journal of Labor Economics, University of Chicago Press, vol. 8(3), pages 295-316, July. [Downloadable!] (restricted)
  7. Ridder, Geert, 1990. "The Non-parametric Identification of Generalized Accelerated Failure-Time Models," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 167-81, April. [Downloadable!] (restricted)
  8. Elbers, Chris & Ridder, Geert, 1982. "True and Spurious Duration Dependence: The Identifiability of the Proportional Hazard Model," Review of Economic Studies, Blackwell Publishing, vol. 49(3), pages 403-09, July. [Downloadable!] (restricted)
  9. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-56, July. [Downloadable!] (restricted)
  10. Narendranathan, W & Stewart, Mark B, 1993. "How Does the Benefit Effect Vary as Unemployment Spells Lengthen?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 361-81, Oct.-Dec.. [Downloadable!] (restricted)
  11. Cosslett, Stephen R, 1983. "Distribution-Free Maximum Likelihood Estimator of the Binary Choice Model," Econometrica, Econometric Society, vol. 51(3), pages 765-82, May. [Downloadable!] (restricted)
  12. Michael Baker & Samuel A. Rea, 1998. "Employment Spells And Unemployment Insurance Eligibility Requirements," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 80-94, February. [Downloadable!] (restricted)
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  13. Hahn, Jinyong, 1994. "The Efficiency Bound of the Mixed Proportional Hazard Model," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 607-29, October. [Downloadable!] (restricted)
  14. Nickell, Stephen J, 1979. "Estimating the Probability of Leaving Unemployment," Econometrica, Econometric Society, vol. 47(5), pages 1249-66, September. [Downloadable!] (restricted)
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