Abstract

http://ssrn.com/abstract=1572804
 
 

References (38)



 
 

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Measurement Errors in Investment Equations


Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Murillo Campello


Cornell University; National Bureau of Economic Research (NBER)

Antonio F. Galvao Jr.


University of Illinois at Urbana-Champaign - Department of Economics

March 16, 2010


Abstract:     
We use Monte Carlo simulations and real data to assess the performance of alternative methods that deal with measurement error in investment equations. Our experiments show that individual-fixed effects, error heteroscedasticity, and data skewness severely affect the performance and reliability of methods found in the literature. In particular, estimators that use higher-order moments are shown to return biased coefficients for (both) mismeasured and perfectly-measured regressors. These estimators are also very inefficient. Instrumental variables-type estimators are more robust and efficient, although they require restrictive assumptions. We estimate empirical investment models using alternative methods. Real-world investment data contain firm-fixed effects and heteroscedasticity, causing high-order moments estimators to deliver coefficients that are unstable across different specifications and not economically meaningful. Instrumental variables methods yield estimates that are robust and seem to conform to theoretical priors. Our analysis provides guidance for dealing with the problem of measurement error under circumstances empirical researchers are likely to find in practice.

Number of Pages in PDF File: 52

Keywords: Investment equations, measurement error, Monte Carlo simulations, instrumental variables, GMM

JEL Classification: G31, C23

working papers series


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Date posted: March 23, 2010 ; Last revised: April 6, 2010

Suggested Citation

Almeida, Heitor and Campello, Murillo and Galvao, Antonio F., Measurement Errors in Investment Equations (March 16, 2010). Available at SSRN: http://ssrn.com/abstract=1572804 or http://dx.doi.org/10.2139/ssrn.1572804

Contact Information

Heitor Almeida
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Murillo Campello (Contact Author)
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
Antonio F. Galvao Jr.
University of Illinois at Urbana-Champaign - Department of Economics ( email )
601 E John St
Champaign, IL 61820
United States
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