AGEC 661 Note Fourteen
نویسنده
چکیده
Note that the variance for ηi is normalized to one since we only observe the sign of Z ′ iγ + ηi. Therefore γ can only be identified up to a scale. A classical example of this two-equation model is the wage regression model, where Yi is the observed wage rate and Di is the labor supply decision, which is decided by the latent calculation that one’s expected wage rate is larger than her reservation wage rate such that she chooses to work. This is the ‘selection bias’ problem, where individuals with observable wage are those who self-select into working since the expected payoff of working offers a higher utility than not working. Under the assumption of bi-variate normality assumption, one can estimate the model
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