Dummy Endogenous Variables in a Simultaneous Equation System

Abstract

This paper considers the formulation and estimation of simultaneous equation models with both discrete and continuous endogenous variables.The statistical model proposed here is sufficiently rich to encompass the álassjcai simultaneous equation model for continuous endogenous variables and more recent models for purely discrete endogenous variables as special cases of a more general model.Interest in discrete data has been ftsledby a rapid growth in the availability of microeconomic data sets coupled with a growing awareness of the importance of discrete choice models for the analysis of uiicroeconomic problems (see McFadden, 1976).To date, the only available statistical models for the analysis of discrete endogenous variables have been developed for the purely discrete case.The log-linear or logistic model of Goodman (1970) as expanded by Raberman (1974) and Nerlove and Press (1976) is one Vol.II, 1967; Lord and Novick, cbs.16-20, 1967.)It is argued in this paper that this class of statistical models provides a natural framework for generating simultaneous equation models with both discrete and continuous random variables.In contrast, the framework of Goodman, while convenient for formulating descriptive models for discrete data, offers a much less natural apparatus for analyzing econometric structural equation models.This is so primarily because the simultaneous equation model is inherently an unconditional representation of behavioral equations while the model of Goodman is designed to facilitate the analysis of conditional representations, and does not lend itself to the unconditional formulations required in simultaneous equation theory.The structure of this paper is in four parts.in part one general models are discussed.Dummy endogenous variables are introduced in two distinct roles: (1) as proxies for unobserved latent variables and (2) as direct shifters of behavioral equations.Five models incorporating such dummy variables are discussed.Part two, also the longest section, presents a complete analysis of the most novel and most general of the five models presented in part one.This is a model with both continuous and discrete endogenous variables.The issues of identification and estimation are discussed together by proving the existence of consistent estimators.Maximum likelihood estimators and alternative estimators are discussed.In part three, a brief discussion of a multivariate probit model with structural shift is presented.Part four presents a comparison between the models developed in this paper and the models of Goodman and Nerlove and Press.