Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 553: Graphical diagnostics of endogeneity

Xavier de Luna () and Per Johansson ()
Additional contact information
Xavier de Luna: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Per Johansson: Office of Labour Market Policy Evaluation, Postal: S 75 120 Uppsala, Sweden

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

JEL-codes: C32; C52

21 pages, February 6, 2001

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