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Maximum simulated likelihood estimation of the panel sample selection model

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  • Hung-Pin Lai
  • Wen-Jen Tsay

Abstract

Heckman's (1976, 1979) sample selection model has been employed in many studies of linear and nonlinear regression applications. It is well known that ignoring the sample selectivity may result in inconsistency of the estimator due to the correlation between the statistical errors in the selection and main equations. In this article, we reconsider the maximum likelihood estimator for the panel sample selection model in Keane et al. (1988). Since the panel data model contains individual effects, such as fixed or random effects, the likelihood function is more complicated than that of the classical Heckman model. As an alternative to the existing derivation of the likelihood function in the literature, we show that the conditional distribution of the main equation follows a closed skew-normal (CSN) distribution, of which the linear transformation is still a CSN. Although the evaluation of the likelihood function involves high-dimensional integration, we show that the integration can be further simplified into a one-dimensional problem and can be evaluated by the simulated likelihood method. Moreover, we also conduct a Monte Carlo experiment to investigate the finite sample performance of the proposed estimator and find that our estimator provides reliable and quite satisfactory results.

Suggested Citation

  • Hung-Pin Lai & Wen-Jen Tsay, 2018. "Maximum simulated likelihood estimation of the panel sample selection model," Econometric Reviews, Taylor & Francis Journals, vol. 37(7), pages 744-759, August.
  • Handle: RePEc:taf:emetrv:v:37:y:2018:i:7:p:744-759
    DOI: 10.1080/07474938.2016.1152657
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