Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2003:4:
Estimation in Binary Choice Models with Measurement Errors

David Edgerton () and Peter Jochumzen ()

Abstract: In this paper we develop a simple maximum likelihood estimator for probit models where the regressors have measurement error. We first assume precise information about the reliability ratios (or, equivalently, the proxy correlations) of the regressors. We then show how reasonable bounds for the parameter estimates can be obtained when only imprecise information is available. The analysis is also extended to situations where the measurement error has non-zero mean and is correlated with the true values of the regressors. An extensive simulation study shows that the estimator works very well, even in quite small samples. Finally the method is applied to data explaining sick leave in Sweden.

Keywords: Measurement error; errors-in-variables; probit; binary choice; bounds; (follow links to similar papers)

JEL-Codes: C25; C29; (follow links to similar papers)

64 pages, April 16, 2003, Revised July 7, 2003

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