Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2000:2: Testing exogeneity in cross-section regression by sorting data

Xavier de Luna () and Per Johansson ()
Additional contact information
Xavier de Luna: Department of Economics, Postal: Umeå University, 90187 Umeå
Per Johansson: IFAU - Office of Labour Market Policy Evaluation, Postal: Labour Market Policy Evaluation, P O Box 513, SE-751 20 Uppsala, Sweden

Abstract: We introduce a framework to test for exogeneity of a variable in a regression based on cross-sectional data. By sorting data with respect to a function (sorting score) of known exogeneous variables it is possible to utilize a battery of tools originally develped to detecting model misspecification in at time series context. Thus, we are able to propose graphical tools for the identification of endogeneity, as well as formal tests, including a simple-to-use Chow test, needing a minimum of assumptions on the alternative endogeneity hypothesis. Models of endogenous treatment and selectivity are utilized to illustrate the methods. With Monte Carlo experiments, including continous and discrete response cases, we compare small sample performances with existing tests for exogeneity.

Keywords: Chow test; Endogenous treatment; Propensity score; Recursive residuals; Sample selection; Sorting score

JEL-codes: C12; C21; C52

32 pages, April 18, 2000

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