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Testing exogeneity of multinomial regressors in count data models: does two stage residual inclusion work?

  • Geraci, A.;
  • Fabbri, D.;
  • Monfardini, C.;

We study a simple exogeneity test in count data models with possibly endogenous multinomial treatment. The test is based on Two Stage Residual Inclusion 2SRI). Results from a broad Monte Carlo study provide novel evidence on important features of this approach in nonlinear settings. We find differences in the finite sample performance of various likelihood-based tests under correct specification and when the outcome equation is misspecified due to neglected over-dispersion or non-linearity. We compare alternative 2SRI procedures and uncover that standardizing the variance of the first stage residuals leads to higher power of the test and reduces the bias of the treatment coefficients. An original application in health economics corroborates our findings.

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Paper provided by HEDG, c/o Department of Economics, University of York in its series Health, Econometrics and Data Group (HEDG) Working Papers with number 14/03.

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Date of creation: Jan 2014
Date of revision:
Handle: RePEc:yor:hectdg:14/03
Contact details of provider: Postal: HEDG/HERC, Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Fax: (0)1904 323759
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