Lecture12联立方程内生性问题Crosssectionandpanel.pptVIP

Research Method;Introducdtion;In econometrics, “endogeneity” usually means that an explanatory variable is correlated with the error term. In simultaneous equation models, endogeneity means that the observed variable is determined by the equilibrium. For example, an observed quantity is determined by the equilibrium between demand and supply. When a variable is endogenous in ‘simultaneous equation’ sense, it is usually endogenous in econometric sense (i.e., correlated with the error term). We will see this soon.;The nature of simultaneous equation.;z1 would be the wage rate of the manufacturing sector. If the manufacturing wage increases, people would move to manufacturing sector, reducing hours worked in agricultural sector. z1 is called the observed demand shifter. u1 is called the unobserved demand shifter. z2 would be agricultural land area. The more land available, more demand for labor. z2 is the observed supply shifter. u1 is the unobserved supply shifter.;Demand and supply describes entirely different relationships. The observed labor quantity and wage rate are determined by the equilibirum between these two equations. The equilibrium: hs=hd ;Consider you have country level data. Then, for each country, we observe only the equilibirum labor supply and wage rate. Demand: hi=α1wi+β1zi1+ui1 Supply: hi=α2wi+β2zi2+ui2 where i is the country subscript. These two equations constitute a simultaneous equations model (SEM). These two equations are called the structural equations. α1,β1, α2, β2 are called the structural parameters. ;In SEM framework, hi and wi are endogenous variables because they are determined by the equilibrium between the two equations. In the same way, zi1 and zi2 are exogenous variables because they are determined outside of the model. u1 and u2 are called the structural errors. One more important point: Without z1 or z2, there is no way to distinguish whether one equation is demand or supp