Testing Exogeneity of Multinomial Regressors in Count Data Models: Does Two Stage Residual Inclusion Work?

Quaderni - Working Paper DSE N° 921

37 Pages Posted: 25 Jan 2014

See all articles by Andrea Geraci

Andrea Geraci

European Commission, Joint Research Centre (JRC)

Daniele Fabbri

University of Bologna - Department of Economics

Chiara Monfardini

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Date Written: January 23, 2014

Abstract

We study a simple exogeneity test in count data models with possibly endogenous multinomial treatment. The test is based on Two Stage Residual Inclusion (2SRI). Results from a broad Monte Carlo study provide novel evidence on important features of this approach in nonlinear settings. We find differences in the finite sample performance of various likelihood-based tests under correct specification and when the outcome equation is misspecified due to neglected over-dispersion or non-linearity. We compare alternative 2SRI procedures and uncover that standardizing the variance of the first stage residuals leads to higher power of the test and reduces the bias of the treatment coefficients. An original application in health economics corroborates our findings.

Keywords: count data, endogenous treatment, exogeneity test, health care utilization

JEL Classification: C12, C31, C35, I11

Suggested Citation

Geraci, Andrea and Fabbri, Daniele and Monfardini, Chiara, Testing Exogeneity of Multinomial Regressors in Count Data Models: Does Two Stage Residual Inclusion Work? (January 23, 2014). Quaderni - Working Paper DSE N° 921, Available at SSRN: https://ssrn.com/abstract=2383923 or http://dx.doi.org/10.2139/ssrn.2383923

Andrea Geraci (Contact Author)

European Commission, Joint Research Centre (JRC) ( email )

Daniele Fabbri

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy

Chiara Monfardini

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy
0039 51 2098148 (Phone)
0039 51 221968 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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