Testing Exogeneity in Cross-Section Regression by Sorting Data
April 18, 2000
32 Pages Posted: 7 May 2001
Date Written: IFAU Working Paper No. 2000:2
We introduce a framework to test for the exogeneity of a variable in a regression based on cross-sectional data. By sorting data with respect to a function (sorting score) of known exogenous variables, it is possible to utilize a battery of tools originally developed to detect model misspecification in a time series context. Thus, we are able to propose graphical tools for the identification of endogeneity, as well as formal tests, including a simple-to-use Chow test, needing a minimum of assumptions on the alternative endogeneity hypothesis. Models of endogenous treatment and selectivity are utilized to illustrate the methods. With Monte Carlo experiments, including continuous and discrete response cases, we compare small sample performances with existing tests for endogeneity.
Keywords: Chow test, endogenous treatment, propensity score, recursive residuals, sample selection, sorting score.
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