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Testing for Monotonicity under Endogeneity An Application to the Reservation Wage Function

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  • Daniel Gutknecht

Abstract

This paper develops a test for monotonicity of nonparametric regression models under endogeneity, which in its generality is novel in the literature. The test statistic, which is built upon a second order U-process, introduces 'correction terms' based on control functions that purge the endogeneity. The test has a non-standard asymptotic distribution from which asymptotic critical values can directly be derived. Furthermore, the test statistic is extended to accommodate multivariate (exogenous) regressors. Consistency against general alternatives is proved and the test's finite sample properties are examined in a Monte Carlo experiment. The test is used to formally assess the monotonicity of the reservation wage as a declining function of elapsed unemployment duration. This relationship is difficult to measure due to the simultaneity of both variables. Preliminary results indicate that reservation wage functions do in fact not decline monotonically.

Suggested Citation

  • Daniel Gutknecht, 2013. "Testing for Monotonicity under Endogeneity An Application to the Reservation Wage Function," Economics Series Working Papers 673, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:673
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    Cited by:

    1. Yusuke Matsuki, 2016. "A Distribution-Free Test of Monotonicity with an Application to Auctions," Working Papers e110, Tokyo Center for Economic Research.
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    3. Yu Zhu, 2020. "Inference in nonparametric/semiparametric moment equality models with shape restrictions," Quantitative Economics, Econometric Society, vol. 11(2), pages 609-636, May.
    4. Zheng Fang & Juwon Seo, 2019. "A Projection Framework for Testing Shape Restrictions That Form Convex Cones," Papers 1910.07689, arXiv.org, revised Sep 2021.

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    More about this item

    Keywords

    control function; endogeneity; reservation wages; test for monotonicity;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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