CPR Working Paper Series No. 77
The Asymptotics for Panel Models with Common Shocks
Chihwa Kao, Lorenzo Trapani, and Giovanni Urga
January 2006
Abstract:
This paper considers models with latent/discrete endogenous regressors
and presents a simulation-based two-step (STS) estimator. The endogeneity
is corrected by adopting a simulation-based control function
approach. The first step consists of simulating of the residuals of the
reduced-form equation for endogenous regressors. The second step is a
regression model (linear, latent or discrete) with the simulated residual as
an additional regressor. In this paper we develop the asymptotic theory
for the STS estimator and its rate of convergence.
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