The Specification of Dynamic Discrete-Time Two-State Panel Data Models

Motu Working Paper No. 16-01

61 Pages Posted: 27 Feb 2016

See all articles by Tue Gørgens

Tue Gørgens

Australian National University (ANU) - Research School of Economics (RSE)

Dean Hyslop

Motu Economic and Public Policy Research

Date Written: February 10, 2016

Abstract

This paper examines dynamic binary response and multi-spell duration model approaches to analyzing longitudinal discrete-time binary outcomes. Prototypical dynamic binary response models specify low-order Markovian state dependence and restrict the effects of observed and unobserved heterogeneity on the probability of transitioning into and out of a state to have the same magnitude and opposite signs. In contrast, multi-spell duration models typically allow for state-specify c duration dependence, and allow the probability of entry into and exit from a state to vary flexibly. We show that both of these approaches are special cases within a general framework. We compare specific dynamic binary response and multi-spell duration models empirically using a case study of poverty transitions. In this example, both the specification of state dependence and the restrictions on the state-specific transition probabilities imposed by the simpler dynamic binary response models are severely rejected against the more flexible multi-spell duration models. Consistent with recent literature, we conclude that the standard dynamic binary response model is unacceptably restrictive in this context.

Keywords: Panel data, transition data, binary response, duration analysis, event history analysis, initial conditions, random effects

JEL Classification: C33, C35, C41, C51

Suggested Citation

Gorgens, Tue and Hyslop, Dean R., The Specification of Dynamic Discrete-Time Two-State Panel Data Models (February 10, 2016). Motu Working Paper No. 16-01, Available at SSRN: https://ssrn.com/abstract=2730988 or http://dx.doi.org/10.2139/ssrn.2730988

Tue Gorgens

Australian National University (ANU) - Research School of Economics (RSE) ( email )

Canberra, Australian Capital Territory 0200
Australia

Dean R. Hyslop (Contact Author)

Motu Economic and Public Policy Research ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

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