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Misclassification of the Dependent Variable in Binary Choice Models: Evidence from Five Latin American Countries

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  • Evangelos M. Falaris

    () (Department of Economics,University of Delaware)

Abstract

Misclassification of the dependent variable in binary choice models can result in inconsistency of the parameter estimates. I estimate probit models that treat misclassification probabilities as estimable parameters for three labor market outcomes: formal sector employment, pension contribution and job change. I use Living Standards Measurement Study data from Nicaragua, Peru, Brazil, Guatemala, and Panama. I find that there is significant misclassification in eleven of the sixteen cases that I investigate. If misclassification is present, but is ignored, estimates of the probit parameters and their standard errors are biased toward zero. In most cases, predicted probabilities of the outcomes are significantly affected by misclassification of the dependent variable. Even a moderate degree of misclassification can have substantial effects on the estimated parameters and on many of the predictions.

Suggested Citation

  • Evangelos M. Falaris, 2007. "Misclassification of the Dependent Variable in Binary Choice Models: Evidence from Five Latin American Countries," Working Papers 07-05, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:07-05.
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    File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2007/UDWP2007-05.pdf
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    Cited by:

    1. Adele Bergin, 2015. "Employer Changes and Wage Changes: Estimation with Measurement Error in a Binary Variable," LABOUR, CEIS, vol. 29(2), pages 194-223, June.
    2. Kent Eliasson & Robert Nakosteen & Olle Westerlund & Michael Zimmer, 2014. "All in the family: Self-selection and migration by couples," Papers in Regional Science, Wiley Blackwell, vol. 93(1), pages 101-124, March.

    More about this item

    Keywords

    Data Quality; Misclassification; Formal Sector; Pension Contributor; Job Change; Nicaragua; Peru; Brazil; Guatemala; Panama;

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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