Specification Testing for Transformation Models

Specification Testing for Transformation Models

Consider a nonseparable model Y=R(X,U) where Y and X are observed, while U is unobserved and conditionally independent of X. This paper provides the first nonparametric test of whether R takes the form of a transformation model, meaning that Y is monotonic in the sum of a function of X plus a functi...

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Bibliographic Details
Main Authors: LEWBEL, Arthur, LU, Xun, SU, Liangjun
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2014
Subjects:
additivity
control variable
endogenous variable
monotonicity
nonparametric nonseparable model
hazard model
specification test
transformation model
unobserved heterogeneity
Econometrics
Online Access:https://ink.library.smu.edu.sg/soe_research/1489
https://ink.library.smu.edu.sg/context/soe_research/article/2488/viewcontent/Specification_Testing_for_Transformation_Models_2014_wp.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:Consider a nonseparable model Y=R(X,U) where Y and X are observed, while U is unobserved and conditionally independent of X. This paper provides the first nonparametric test of whether R takes the form of a transformation model, meaning that Y is monotonic in the sum of a function of X plus a function of U. Transformation models of this form are commonly assumed in economics, including, e.g., standard specifications of duration models and hedonic pricing models. Our test statistic is asymptotically normal under local alternatives and consistent against nonparametric alternatives. Monte Carlo experiments show that our test performs well in finite samples. We apply our results to test for specifications of generalized accelerated failure-time (GAFT) models of the duration of strikes and of marriages.

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