Exogeneity Assumption Research Articles

Factor Market Distortion and Interfirm Productivity Dispersion: Theoretical and Empirical Analysis

Resources misallocation is prominently embodied by continuous and significant productivity dispersion among firms,especially obvious in manufacturing in China. Based on the typical fact of hysteresis of factor marketization reform in China,this paper studies the effect of factor market distortion on interfirm productivity dispersion. After relaxing the exogenous assumption of firm entry and exit in typical models,new theoretical analysis shows that distorted factor prices affect enterprise production behavior and decisions on entry and exit,lower the critical value of the productivity distribution in the market equilibrium,and thus make enterprises with low efficiency survive,leading to the partial failure of market selection mechanism of the survival of the fittest and finally widening interfirm productivity dispersion. Furthermore,based on marketization indexes in China,it estimates price distortion degree of industry factors,and tests the relationship between factor market distortion and interfirm productivity dispersion by using the data of manufacturing enterprises in China Industrial Enterprise Database from 1998 to 2007. It concludes that the reduction in factor market distortion index by 1% leads to the decrease in interfirm productivity dispersion by 0.46%. It is of great policy significance to the correction of factor market distortion,the formation of market-oriented factor price mechanism and thereby the promotion of effective interfirm competition to achieve the optimization of resources distribution.

Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector”

November 01 2017 Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector” Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2017 by the Asian Economic Panel and the Massachusetts Institute of Technology2017Massachusetts Institute of Technology Asian Economic Papers (2017) 16 (3): 311–312. https://doi.org/10.1162/asep_a_00579 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector”. Asian Economic Papers 2017; 16 (3): 311–312. doi: https://doi.org/10.1162/asep_a_00579 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Wing Thye Woo led the discussion with a number of comments on Shen's representation of China's banking sector. First, in describing the activities of China's banking sector, Woo advised the authors to consider using the term implicit deposit rate premium rather than implicit interest, because this change in terminology more directly conveys the measurement of payment above and beyond the explicit interest rate. Next, Woo cautioned that the bank maximization problem is more complex than it is in the paper. In particular, the model treats the revenue per loan, ra, as exogenous. Although the exogeneity assumption may be an accurate representation of China's banking sector in 2005, however, Woo argued that assumption of exogeneity was no longer appropriate by 2013. Instead, Woo suggested that the modeling of bank decisions in 2013 should allow for the endogenous selection of both ra and the implicit interest rate, im... You do not currently have access to this content.

Identification in Models with Discrete Variables

This paper provides a novel, simple, and computationally tractable method for determining an identified set that can account for a broad set of economic models when the economic variables are discrete. Using this method, we show using a simple example how imperfect instruments affect the size of the identified set when the assumption of strict exogeneity is relaxed. This knowledge can be of great value, as it is interesting to know the extent to which the exogeneity assumption drives results, given it is often a matter of some controversy. Moreover, the flexibility obtained from our newly proposed method suggests that the determination of the identified set need no longer be application specific, with the analysis presenting a unifying framework that algorithmically approaches the question of identification.

Effects of intrinsic sources of spatial autocorrelation on spatial regression modelling

Abstract Detecting and dealing with spatial autocorrelation (SA) are indispensable steps in analyses of geospatial data. Despite consensus that SA originates from both extrinsic factors and intrinsic interactions, previous studies on regression analysis of spatially autocorrelated data have rarely controlled for intrinsic sources in addition to extrinsic ones to assess ceteris paribus (i.e. causal) effects of interest, with the strict exogeneity assumption that errors containing unexplained variance are uncorrelated with explanatory variables for all observations. This assumption becomes invalid when intrinsic SA is not an external process modelled as errors and needs to be controlled for. Here, we aimed to assess the extent to which not controlling for intrinsic SA negatively affects model performance, specifically in terms of type I error rate and unbiasedness of coefficient estimates, and to identify models that are able to handle these problems. To this end, we applied two categories of regression models that do (intrinsic category) or do not (extrinsic category) explicitly control for intrinsic SA to artificial data generated with both SA sources. These models included the extended spatial Durbin model (ESDM) and its nested models. Four analytic scenarios simulated modelling conditions with increasing complexity of variables omitted during modelling. The two more complex scenarios involved additional violations of strict exogeneity. We found that intrinsic—just as extrinsic—SA can produce incorrect type I error rates, if not explicitly controlled for. Failing to control for intrinsic SA also generated bias in estimates of ceteris paribus effects. However, ESDM from the intrinsic category exhibited consistently good performance in dealing with intrinsic SA across all the scenarios, but suffered other violations of strict exogeneity. Overall, model specification should control for both extrinsic and intrinsic processes generating SA in spatial data to provide reliable type I error rates and unbiased estimates of ceteris paribus effects. Given the likely widespread occurrence in observational spatial data of unknown or unmeasurable processes, ESDM should be a generally preferred starting point to explore the optimal model specification for estimating ceteris paribus effects, with due caution to other violations of strict exogeneity.

Does certificate of need law enhance competition in inpatient care market? An empirical analysis.

This article investigates the impact of Certificate of Need (CON) laws on competition in the inpatient care market. One of the major criticisms of these laws is that it may hinder competition in the health care market, which can lead to higher prices. However, from a theoretical standpoint, CON laws could also promote competition by limiting excessive expansion from incumbents. Our main conclusion is that CON laws by and large enhanced competition in the inpatient market during the period of our study. This indicates that the effects of CON laws to hinder predatory behavior could dominate its effects of preventing new entrants into the inpatient care market. We do not find statistically significant evidence to reject the exogeneity assumption of either CON laws or their stringency in our study. We also find factors such as proportion of population aged 18-44, proportion of Asian American population, obesity rate, political environment, etc., in a state significantly impact competition. Our findings could shed some light to public policy makers when deciding the appropriate health programs or legislative framework to promote health care market competition and thereby facilitate quality health care.

Measuring Benchmark Damages in Antitrust Litigation: Extensions and Practical Implications

This paper compares the “forecasting approach” and the “fully interacted approach” to estimation of cartel damages. We investigate the impact of relaxing the assumptions of exogeneity and stationarity, both theoretically and in Monte Carlo simulations. The results suggest that the advantages of the fully interacted approach are less clear and that the forecasting approach may be more robust to the relaxations of some of these maintained assumptions.

Body-weight and psychological well-being in the UK general population.

While the consequences of body weight for physical health are well explored, the evidence for psychological well-being is less straightforward. An instrumental variable approach is used to address the endogenous relationship between body weight and well-being in the UK general population. Data from the Health Survey for England (2003, 2004 and 2006) are used to fit linear and ordered probit instrument variable models for a sample of 13 862 individuals, with frequent white meat consumption instrumenting for body-weight. Non-linearities in the relationship, robustness to weak instruments and relaxation of strict exogeneity assumption are further examined. Accounting for endogeneity and conditional on health a protective effect on well-being is observed. A unit increase in body mass index (BMI) improves General Health Questionnaire (GHQ) by 0.17 (95% CI: 0.02-0.31) points and reduces the probability of reporting very low GHQ by 2.5% (95% CI: 0.01-0.05). Empirical testing showed that the instrument performs well, with increased meat consumption adding 0.58 points (95% CI: 0.42-0.74) to ones' BMI. We present support for the jolly-fat hypothesis, however, caution is recommended in drawing inferences. Further research needs to resolve the mixed findings in the literature.

Assessing the Relationship Between Mental Distress and Tobacco Use in Post-Katrina and Rita Louisiana

ABSTRACTBackground: The relationship between mental health status and smoking is complicated and often confounded by bi-directionality, yet most research on this relationship assumes exogeneity. Objectives: The goal of this article is to implement an instrumental variable approach to (1) test the exogeneity assumption and (2) report on the association between mental health status and smoking post-disaster. Methods: This analysis utilizes the 2006 and 2007 Louisiana Behavioral Risk Factor Surveillance Survey to examine the link between mental distress and smoking in areas affected by Hurricanes Katrina and Rita. Residence in a hurricane-affected parish (county) was used as an instrumental variable for mental distress. Results: Just over 22% of the sample resided in a hurricane-affected parish. Residents of hurricane-affected parishes were significantly more likely to report occasional and frequent mental distress. Residence in a hurricane-affected parish was not significantly associated with smoking status. With residence established as a salient instrumental variable for mental distress, the exogeneity assumption was tested and confirmed in this sample. A dose-response relationship existed between mental distress and smoking, with smoking prevalence increasing directly (and non-linearly) with mental distress. Conclusions: In this sample, the relationship between mental distress and smoking status was exogenous and followed a dose-response relationship, suggesting that the disasters did not result in an uptake of smoking initiation, but that the higher amounts of mental distress may lead to increased use among smokers. The findings suggest that tobacco control programs should devise unique strategies to address mentally distressed populations.

Disaster, Aid, and Preferences: The Long-run Impact of the Tsunami on Giving in Sri Lanka

Summary Do natural disasters produce effects on preferences of victims in the long run? We test the impact of the tsunami shock on generosity of a sample of Sri Lankan affected/unaffected microfinance borrowers seven years after the event. Specifically, we test the effect of the shock at the extensive margin by comparing damaged with non-damaged individuals in terms of giving and expected giving in a dictator game. Moreover, at the intensive margin, we compare the participants based on the amount of damage experienced and recovery aid received. The advantage of this last comparison is that differences in observables between the groups are minimized. We reduce further identification problems by selecting a random sample of damaged and non-damaged borrowers belonging to the same microfinance organization who are, therefore, likely to share some important common traits that are usually unobservable to researchers. We complete our identification strategy with weighted least squares, instrumental variable estimates and a sensitivity analysis on the exogeneity assumption. The main findings of the paper support the hypothesis that the shock affects participants’ preferences in the long run. First, the tsunami negatively affects generosity at the extensive margin as those who suffered at least one damage give and expect less than those who did not. Second, while large recovery assistance does not directly affect giving and expected giving, it increases especially the latter indirectly, i.e., when interacted with the number of damages. Our results reconcile that part of the literature showing evidence of natural shocks having a detrimental effect on social preferences (Fleming, Chong, Alberto, & Bejarano, 2011; Cassar, Grosjean, & Whitt, 2013) with that supporting, instead, a positive link (Solnit, 2009; Whitt & Wilson, 2007; Cassar, Healy, & Von Kessler, 2011). Furthermore, since our study focuses on the long-run impact of a natural disaster, previous results on short-run effects are not necessarily inconsistent with ours.

Calibration of fundamental diagram using trajectories of probe vehicles: Basic formulation and heuristic algorithm

Abstract: A fundamental diagram (FD), also known as flow–density relation, is one of the most important principles in traffic flow theory. It would be valuable if an FD could be calibrated by using GPS-equipped probe vehicles; since they can continuously collect data from wide spatiotemporal area, compared to traditional fixed sensors. This paper proposes methods for calibrating an FD from trajectories of sampled vehicles. We formulate a method that identifies values of a free-flow speed and a critical density of a tri-angular FD, while it relies on exogenous assumptions on FD's functional form and a value of its jam density. Then, a heuristic algorithm for FD calibration in actual traffic environment is developed based on the proposed method. It was validated using traffic data generated by microscopic traffic simulator. The results suggested that the proposed methods can calibrate an FD precisely and robustly. It implies that FDs in road sections on which congestion happens frequently can be calibrated using probe vehicles, if probe vehicle data were collected for a long period. Therefore, the proposed methods would contribute to significant improvement of applicability of probe vehicle-based traffic management methods.

The Effect of Banks' Financial Position on Credit Growth: Evidence from OECD Countries

This paper presents empirical evidence on the effect of banks' financial position on credit growth using a sample of 29 OECD countries. The failure of the exogeneity assumption of explanatory variables is addressed using dynamic panel type instruments. The empirical results show that among capital, profits and liquidity at the end of the previous year, capital is the most important predictor of credit growth in the current year. The relationship between capital and credit growth is non-linear. Point estimates from the preferred econometric specification imply that at the sample mean a one standard deviation increase (decrease) in capital is associated with an increase (decrease) of 0.8 (0.3) percentage points in credit growth upon impact and 1.6 (0.6) percentage points in the long-run.

Testing the IV Zero-Covariance Assumption and Identification with an Invalid Instrument

This paper discusses the empirical content of the exogeneity (zero-covariance) assumption, the key assumption for identification in the linear IV model. Contrary to the general belief, we show that whenever the outcome is bounded, the exogeneity assumption imposes some testable restrictions on the observables, namely the linear instrumental inequalities (LII). The LII can therefore be used to test the instrument validity. The test can be easily implemented using existing inferential methods for testing multiple inequalities. Whenever, the causal effect parameter is random, an additional critical condition that trivially holds in the linear IV model is required for the IV estimand to identify the average treatment effect (ATE). We show that when this critical condition holds while the exogeneity assumption does not, the magnitude of the violations of the LII allows us to derive (informative) bounds on the ATE. We also derive testable implications of this critical condition which when violated implies that the usual IV estimand cannot be interpreted as the ATE or as the local ATE. We illustrate our results by testing the validity of various instruments present in the literature.

Modeling Health Insurance Enrollment Decisions in the U.S., Under Preferences Endogeneity: A Bayesian Multinomial Probit Approach

Early work on consumer health insurance preference modeling suggests that workers sorting among employment alternatives reflect their tastes for employment-sponsored health insurance. Focusing on examining the role of health insurance preferences on enrollment decisions into employment sponsored health insurance, this past literature assumes the effects of health insurance preferences to be statistically exogenous. Therefore, extending analysis beyond employment sponsored health insurance preference modeling, while relaxing the exogeneity assumption, this article models the effects of stated consumption preferences for health insurance on revealed choices of health insurance using a framework in which stated consumption preferences are assumed to be endogenous in the statistical sense. A discrete choice analysis is implemented where both stated preferences and choice outcomes are modeled using multinomial probit and estimated within the Bayesian paradigm using a full Gibbs sampler. This estimation strategy is one of the first of its kind in consumer preference modeling, and improves computational efficiency and overall simplicity compared to related work using full information maximum likelihood. The analysis uses data from the 2007 medical expenditure panel survey, and the results provide substantial evidence on the importance of stated consumer preferences on revealed consumption choices of health insurance in the US.

Trends and Cycles in Small Open Economies: Making the Case for a General Equilibrium Approach

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modelling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

Global paper market forecasts to 2030 under future internet demand scenarios

The Global Forest Products Model (GFPM) was applied to forecast the effect of increased per capita Internet adoption on the global paper products industry to 2030. Two scenarios were examined: (a) full per capita Internet adoption by 2100, and (b) more rapidly by 2050. Global newsprint consumption is estimated to be 34.2–37.1 million tonnes lower in 2030 than in the US Forest Service 2010 Resources Planning Act report, and the 2010 report from the Food and Agriculture Organization of the United Nations. Similarly, global printing and writing paper consumption is forecasted to be 76.7–87.1 million tonnes lower by 2030. By including controls for per capita Internet use in the demand equations for print based media, this article reflects the recent declines in global paper product consumption. Out-of-sample forecasts over a two-year period indicate global model prediction errors from 0 to 3%, depending on the product and exogenous assumptions. The results highlight the importance of considering market evolution in long-term global forecasting, and a failure to account for future rates of Internet adoption will result in an upward bias on paper product market forecasts.

Trends and cycles in small open economies: making the case for a general equilibrium approach

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

Sociability, altruism and well-being

We provide non-experimental evidence of the relevance of sociability to subjective well-being by investigating the determinants of life satisfaction on a sample of Europeans aged above 49. Departing from the neoclassical Homo economicus paradigm of human behaviour, we document that voluntary work, religious attendance, helping friends/neighbours and participation in community-related organisations affect life satisfaction positively and significantly. Moreover, different combinations between actions and motivations generate differential effects on life satisfaction, thereby providing support to the importance of these specific ‘contingent goods’ and to the literature of procedural utility. Our empirical findings are confirmed in robustness checks including refinements of the dependent variable, instrumental variables and sensitivity analysis on departures from the exogeneity assumption.

Panel Data Estimation in Finance: Testable Assumptions and Parameter (In)Consistency

We examine the strict exogeneity assumption, a necessary and often overlooked condition for consistency of many panel data estimators that are used in financial research. We test this assumption in several common settings and find that these tests very frequently reject. We offer guidance on detecting violations of the strict exogeneity assumption and provide evidence on the possible magnitude of the resulting estimation errors. Alternative estimation approaches when strict exogeneity is violated are discussed. We investigate the testable assumptions underlying these alternative approaches and characterize current practices. Implications of our findings for empirical financial research strategies are discussed.

Dealing with Heteroskedasticity, Autocorrelation and Endogeneity in German Audit Fee Panel Data - Comparing Approaches

In this paper we provide an extensive comparison between commonly used linear econometric methods in the audit fee literature and explicitly address their underlying assumptions. As opposed to common practice in similar papers we explicitly consider violations of the strict exogeneity assumption in terms of unobserved firm-specific effects and argue that endogeneity is likely to be present in audit fee data sets. This leads to significantly different results for magnitude and significance level of most explanatory variables. Additionally, we encourage researchers to use the in the audit fee literature not so widely-spread Hausman-Taylor estimator to benefit from its efficiency.

Like family: Network coevolution and the emergence of altruism

ABSTRACTAltruism is difficult to explain in an evolutionary context—the mechanisms of selection appear to favor selfishness. Existing scholarly work addressing this puzzle relies on structural and behavioral assumptions that severely limit generalizability. The model presented in this article circumvents the need for such assumptions by incorporating an evolving network component to natural selection. Through a process of coevolution of individual and relational traits, many of the exogenous assumptions of previous models of the evolution of cooperation are realized endogenously within a simulated population. Such endogeneity allows a more precise examination of conditions under which cooperation arises, but also a clearer understanding of how those conditions themselves arise. The model is specified analytically, and interpretation is carried out on simulated outcomes.