Umeå Economic Studies, Department of Economics, Umeå University
No 553:
Graphical diagnostics of endogeneity
Xavier de Luna ()
and Per Johansson ()
Abstract: We show that in sorting cross-sectional data, the
endogeneity of a variable may be successfully detected by graphically
examining the cumulative sum of the recursive residuals. An interesting
case arises with a continuous or ordered (e.g., years of schooling)
endogenous variable. Then, a graphical test for misspecification due to
endogeneity (e.g., self selection) can be obtained without instrumental
variables. Moreover, the sign of the bias implied by this endogeneity
becomes deducible through such graphs.
Keywords: CUSUM plot; Recursive residuals; Return to schooling; Self selection; (follow links to similar papers)
JEL-Codes: C32; C52; (follow links to similar papers)
21 pages, February 6, 2001
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