Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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

David Edgerton () and Peter Jochumzen ()
Additional contact information
David Edgerton: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Peter Jochumzen: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: C25; C29

64 pages, First version: April 16, 2003. Revised: July 7, 2003.

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