Control Functions and Simultaneous Equations Methods
American Economic Review
vol. 103,
no. 3, May 2013
(pp. 563-69)
Abstract
The control function approach is a convenient method of estimation in simultaneous equation systems. This requires that the system can be expressed in triangular form with variables satisfying a conditional mean independence restriction. Linear simultaneous models with additive errors can always be expressed in this form. However, in nonlinear nonadditive simultaneous systems, conditional independence requires a strong additional restriction known as control function separability. We argue that nonadditive models are a key characteristic of simultaneous models of economic behavior with unobserved heterogeneity. We review alternative "system" approaches and document the biases that occur when the control function approach is used inappropriately.Citation
Blundell, Richard, Dennis Kristensen, and Rosa L. Matzkin. 2013. "Control Functions and Simultaneous Equations Methods." American Economic Review, 103 (3): 563-69. DOI: 10.1257/aer.103.3.563Additional Materials
JEL Classification
- C26 Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation
- C36 Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation