Description: Department Seminar: Tao Wang (University of Victoria)
Location: 368A Heady Hall
Contact Person: Otavio Bartalotti
Title: Endogeneity in Modal Regression
Abstract: We propose a control function approach to account for endogeneity in a parametric modal regression, where the conditional mode of the unobservable error term on explanatory variables is nonzero. We develop a computationally attractive two-step estimation procedure with the conditional mode independence restriction. The consistency and asymptotic properties of the estimators for both the parametric and nonparametric parts are rigorously established. Two applications to real datasets of Return to Schooling and Colonial Origins of Comparative Development are conducted to evaluate the finite sample performance of the suggested estimation procedure. We further introduce a dynamic model of rational behavior under uncertainty, in which the agent maximizes the present discounted value of the stream of future modal utilities, and develop a modal Euler equation derived from the maximization model that the agent must satisfy in equilibrium. We estimate the modal elasticity of intertemporal substitution directly from the stochastic Euler equation via the developed method.