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A control function approach to estimating switching regression models with endogenous explanatory variables and endogenous switching

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  • Murtazashvili, Irina
  • Wooldridge, Jeffrey M.

Abstract

We derive simple, multi-step estimation methods for a linear model with heterogeneous coefficients when there are both continuous and discrete endogenous explanatory variables. We consider both cross-sectional and panel data settings. When we extend our model to panel data, we use the Chamberlain–Mundlak device to allow heterogeneity to be correlated with time-varying explanatory variables. We apply the panel data methods we propose to estimation of a housing budget share equation where a homeownership dummy variable plays the role of the endogenous regime, and total expenditure plays the role of a continuous endogenous explanatory variable. We find that the constant coefficient model seems sufficient, and that the estimation methods we propose produce rather plausible estimates of the model parameters.

Suggested Citation

  • Murtazashvili, Irina & Wooldridge, Jeffrey M., 2016. "A control function approach to estimating switching regression models with endogenous explanatory variables and endogenous switching," Journal of Econometrics, Elsevier, vol. 190(2), pages 252-266.
    • Handle: RePEc:eee:econom:v:190:y:2016:i:2:p:252-266
    DOI: 10.1016/j.jeconom.2015.06.014
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    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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