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Nonparametric Specification Testing in Random Parameter Models

Author

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  • Christoph Breunig

    (Humboldt-Universität zu Berlin)

  • Stefan Hoderlein

    (Boston College)

Abstract

In this paper, we suggest and analyze a new class of specification tests for random coefficient models. These tests allow to assess the validity of central structural features of the model, in particular linearity in coefficients and generalizations of this notion like a known nonlinear functional relationship. They also allow to test for degeneracy of the distribution of a random coefficient, i.e., whether a coefficient is fixed or random, including whether an associated variable can be omitted altogether. Our tests are nonparametric in nature, and use sieve estimators of the characteristic function. We analyze their power against both global and local alternatives in large samples and through a Monte Carlo simulation study. Finally, we apply our framework to analyze the specification in a heterogeneous random coefficients consumer demand model.

Suggested Citation

  • Christoph Breunig & Stefan Hoderlein, 2016. "Nonparametric Specification Testing in Random Parameter Models," Boston College Working Papers in Economics 897, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:897
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    References listed on IDEAS

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    Cited by:

    1. Fabian Dunker & Konstantin Eckle & Katharina Proksch & Johannes Schmidt-Hieber, 2017. "Tests for qualitative features in the random coefficients model," Papers 1704.01066, arXiv.org, revised Mar 2018.

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    More about this item

    Keywords

    Nonparametric specification testing; random coefficients; unobserved heterogeneity; sieve method; characteristic function; consumer demand;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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