Control Functions and Simultaneous Equations Methods
Richard Blundell, Dennis Kristensen, Rosa L. Matzkin
American Economic Review · 2013 · Volume 103 · Issue 3
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.
Keywords
Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation, Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation
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