Economics Working Papers

Publication Date

3-29-2021

Number

21003

Abstract

This paper focuses on the bivariate probit model's identifying
assumptions: joint normality of errors, instrument exogeneity, and relevance conditions. First, we develop novel sharp testable equalities that can detect all possible observable violations of the assumptions. Second, we propose an easy-to-implement testing procedure for the model's validity based on feasible testable implications using existing inference methods for intersection bounds. The test achieves correct empirical size for moderately sized samples and performs well in detecting violations of the conditions in Monte Carlo simulations. Finally, we provide researchers with a road map on what to do when the bivariate probit model is rejected, including novel bounds for the average treatment effect that relax the normality assumption. Empirical examples illustrate the methodology's implementation.

JEL Classification

C14, C21, C25, C26

Version History

Original Release Date: March 29, 2021

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

47 pages

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