Publication Type

Journal Article

Version

submittedVersion

Publication Date

7-2016

Abstract

Monotonicity in a scalar unobservable is a common assumption when modeling heterogeneity in structural models. Among other things, it allows one to recover the underlying structural function from certain conditional quantiles of observables. Nevertheless, monotonicity is a strong assumption and in some economic applications unlikely to hold, e.g., random coefficient models. Its failure can have substantive adverse consequences, in particular inconsistency of any estimator that is based on it. Having a test for this hypothesis is hence desirable. This paper provides such a test for cross-section data. We show how to exploit an exclusion restriction together With a conditional independence assumption, which in the binary treatment literature is commonly called unconfoundedness, to construct a test. Our statistic is asymptotically normal under local alternatives and consistent against global alternatives. Monte Carlo experiments show that a suitable bootstrap procedure yields tests with reasonable level behavior and useful power. We apply our test to study the role of unobserved ability in determining Black-White wage differences and to study whether Engel curves are monotonically driven by a scalar unobservable.

Keywords

Control variables, Conditional exogeneity, Endogenous variables, Monotonicity, Nonparametrics, Nonseparable, Specification test, Unobserved heterogeneity

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

193

Issue

1

First Page

183

Last Page

202

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2016.02.015

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jeconom.2016.02.015

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