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Sequentially Estimating the Structural Equation by Power Transformation

Author

Listed:
  • Jaedo Choi

    (Univ of Michigan)

  • Jin Seo Cho

    (Yonsei Univ)

  • Hyungsik Roger Moon

    (Univ of Southern California)

Abstract

This study provides an econometric methodology to test for a linear structural relationship among economic variables. For this, we propose the so-called distance-difference (DD) test statistic and show that it has omnibus power against arbitrary nonlinear structural relationships. If the DD test statistic rejects the linear model hypothesis, a sequential testing procedure assisted by the DD test statistic can consistently estimate the degree of polynomial function that arbitrarily approximates the nonlinear structural equation. Using extensive Monte Carlo simulations, we confirm the DD test’s finite sample properties and compare its performance with the sequential testing procedure assisted by the J-test statistic and moment selection criteria. Finally, we empirically investigate the structural relationship between the log wage and work experience years using Card’s (1995) National Longitudinal Survey data and affirm their inferential results by our methodology.

Suggested Citation

  • Jaedo Choi & Jin Seo Cho & Hyungsik Roger Moon, 2020. "Sequentially Estimating the Structural Equation by Power Transformation," Working papers 2020rwp-162, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2020rwp-162
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    References listed on IDEAS

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    More about this item

    Keywords

    GMM estimation; Model linearity testing; Model specification testing; Gaussian stochastic process; Sequential testing procedure; Wage equation;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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