Scandinavian Working Papers in Economics

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

No 2001:9: Testing exogeneity under distributional misspecification

Xavier de Luna and Per Johansson ()
Additional contact information
Xavier de Luna: IFAU - Office of Labour Market Policy Evaluation, Postal: Labour Market Policy Evaluation, P O Box 513, SE-751 20 Uppsala, Sweden
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 propose a general test for exogeneity that is robust against distributional misspecification. The test can also be used to identify other types of misspecifications, such as the presence of a random coefficient. The idea is to sort the data with respect to a variable (a sorting score) and then split the sample into two parts. Using a Chow test, it can then be tested whether estimated parameters in the two sub-samples are different. We give conditions under which it is possible to test for exogeneity by using the (supposedly) endogenous variable as a sorting score. The resulting test does not need instrumental variables. Evidence from a Monte Carlo study and an empirical application suggets that the test can be useful for practitioners.

Keywords: Absenteeism at work; endogeneity; linear exponential family; random effect; random coefficient; selectivity

JEL-codes: C12; C14; C15; C21; C31; C52

33 pages, July 18, 2001

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