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title: "Exponentional conditional mean models with endogeneity"
date: today
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%\VignetteIndexEntry{Exponentional conditional mean models with endogeneity}
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# The linear conditional mean model
The linear model $y_n = \beta ^ \top x_n + \epsilon_n$, with
$\mbox{E}(\epsilon \mid x) = 0$ implies a linear conditional mean function:
$\mbox{E}(y \mid x) = \beta^\top x$. It implies the following moment
conditions:
$$
\mbox{E}\left(y - \beta^\top x\right)=0
$$
which can be estimated on a given sample by:
$$
\frac{1}{N}\sum_{n=1} ^ N (y_n - \beta^\top )x_n = X^\top (y_n -
\beta^\top ) / N
$$
Solving this vector of $K$ empirical moments for $\beta$ leads to the
OLS estimator.
If some of the covariates are endogenous, a consistent estimator can
be obtained if there is a set of $L \geq K$ series exogenous $Z$, some
of them being potentially elements of $X$. Then, the $L$ moment
conditions can be estimated by:
$$
\bar{m} = \frac{1}{N}\sum_{n=1} ^ N (y_n - \beta^\top )z_n = Z^\top \epsilon / N
$$
The variance of $\sqrt{N} \bar{m}$ is $\Omega = N\mbox{E}\left(
\bar{m} \bar{m}^\top\right) = \frac{1}{N} \mbox{E}\left(Z^\top
\epsilon \epsilon ^ \top Z\right)$, which reduce to $\sigma_\epsilon ^
2 Z^\top Z$ if the errors are iid and, more generaly, can be
consistently estimated by $\frac{1}{N}\sum_{n=1} ^ N \hat{\epsilon}_n
^ 2 z_n z_n^\top$ where $\hat{\epsilon}$ are the residuals of a
consistent estimation.
The IV estimator minimise the quadratic form of the moments with the
inverse of its variance assuming that the errors are iid:
$$
\epsilon ^ \top Z \left(\sigma ^ 2 Z ^ \top Z\right) ^ {-1} Z ^ \top
\epsilon = \epsilon ^ \top P_Z \epsilon / \sigma ^ 2
$$
which is the IV estimator. As $P_Z X$ is the projection of the column
of X on the subspace generated by the columns of $Z$, this estimator
can be performed by first regressing every covariates on the set of
instruments and then regressing the response on these fitted values
(2SLS).
The IV estimator is consistent but inefficient if the errors are not
iid. In this case, a more efficient estimator can be obtained by
minimizing $\bar{m}^\top \hat{\Omega} ^ {-1} \bar{m}$ with:
$$
\hat{\Omega} = \frac{1}{N}\sum_{n=1} ^ N \hat{\epsilon}_n ^ 2 z_n z_n^\top
$$
where $\hat{\epsilon}$ can be the residuals of the IV estimator. This
is the GMM estimator.
# The exponential linear conditional mean model
The linear model is often inappropriate if the conditional
distribution of $y$ is asymetric. In this case, a common solution is
to use $\ln y$ instead of $y$ as the response.
$$\ln y_n = \beta ^ \top x_n + \epsilon$$
This is of course possible only if $y_n > 0 \forall n$. An alternative
is to use an exponential linear conditional mean model, with additive:
$$
y_n = e^{\beta^\top x_n} + \epsilon_n
$$
or with multiplicative errors:
$$
y_n = e^{\beta^\top x_n} \nu_n
$$
If all the covariates are exogenous, $\mbox{E}\left(y - e^{\beta^\top
x} \mid x\right) = 0$ which corresponds to the following empirical moments:
$$
X^ \top \left(y - e ^ {\beta^\top x}\right) / N = 0
$$
This define a non-linear system of $K$ equations with $K$ unknown
parameters ($\beta$) that is in particular used when fitting a Poisson
model with a log link for count data. It can also be used with any
non-negative response.
If some of the covariates are endogenous, as previously an IV
estimator can be defined. For additive errors, the empirical moments
are:
$$
\frac{1}{N}\sum_{n=1} ^ N (y_n - e^{\beta^\top x_n})z_n = Z^\top (y_n -
e^{\beta^\top x_n )} / N
$$
and the IV estimator minimize:
$$
\epsilon ^ \top Z \left(\sigma ^ 2 Z ^ \top Z\right) ^ {-1} Z ^ \top
\epsilon = \epsilon ^ \top P_Z \epsilon / \sigma ^ 2
$$
Denoting $\hat{\epsilon}$ the residuals of this regression, the same
$\hat{\omega}$ matrix can be constructed and used in a second step to
get the more efficient GMM estimator.
With additive errors, the only difference with the linear case is that
the minimization process results in a set of non linear equations, so
that some numerical methods should be used.
With mlultiplicative errors, we have: $\nu_n = y_n / e^{\beta^\top
x_n}$, with $\mbox{E}(nu_n \mid x_n) = 1$ if all the covariates are
exogenous. Defining $\tau_n = \nu_n - 1$, the moment conditions are
then:
$$
\mbox{E}\left((y/e^{\beta^\top x} - 1)x_n\right)=0
$$
If some covariates are endogenous, this should be replaced by:
$$
\mbox{E}\left((y/e^{\beta^\top x} - 1)z_n\right)=0
$$
which leads to the following empirical moments:
$$
\frac{1}{N}\sum_{n=1} ^ N (y_n/e^{\beta^\top x_n} - 1)z_n = Z^\top (y/
e^{X^\top\beta}- 1) / N = Z^\top \tau_n
$$
Minimizing the quadratic form of these empirical moments with $(Z^\top
Z) ^{-1}$ or $\left(\sum_{n=1} ^ N \hat{\tau}_n ^ 2 z_n
z_n^\top\right) ^ {- 1}$ leads respectively to the IV and the GMM
estimators.
# Sargan test
When the number of external instruments is greater that the number of
endogenous variables, the empirical moments can't be simultanoulsy set
to 0 and a quadratic form of the empirical moments is minimized. The
value of the objective function at convergence time the size of the
sample is, under the null hypothesis that all the instruments are
exogenous a chi square with a number of degrees of freedom equal to
the difference between the number of instruments and the number of
covariates.
# Cigarette smoking behaviour
@MULL:97 estimate a demand function for cigarettes which depends on
the stock of smoking habits. This variable is quite similar to a
lagged dependent variable and is likely to be endogenous as the
unobservable determinants of current smoking behaviour should be
correlated with the unobservable determinants of past smoking
behaviour. The data set contains observations of 6160 males in 1979
and 1980 from the smoking supplement to the 1979 National Health
Interview Survey. The response `cigarettes` is the number of
cigarettes smoked daily. The covariates are the habit "stock" `habit`,
the current state-level average per-pack price of cigarettes `price`,
a dummy indicating whether there is in the state of residence a
restriction on smokong in restaurants `restaurant`, the age `age` and the
number of years of schooling `educ` and their squares, the number of
family members `famsize`, and a dummy `race` which indicates whether
the individual is white or not. The external instruments are cubic
terms in `age` and `educ` and their interaction, the one-year lagged
price of a pack of cigarettes `lagprice` and the number of years the
state's restaurant smoking restrictions had been in place.
The data set is called `cigmales` and is lazy loaded while attaching
the **micsr** package.
The starting point is a basic count model, ie a Poisson model with a
log link:
```{r}
#| message: false
library(micsr)
cigmales <- cigmales |>
transform(age2 = age ^ 2, educ2 = educ ^ 2,
age3 = age ^ 3, educ3 = educ ^ 3,
educage = educ * age)
pois_cig <- glm(cigarettes ~ habit + price + restaurant + income + age +
age2 + educ + educ2 + famsize + race, data = cigmales,
family = quasipoisson)
```
The IV and the GMM estimators are provided by the `expreg`
function. Its main argument is a two-part formula, where the first
part indicates the covariates and the second part the instruments. The
instrument set can be constructed from the covariate set by indicating
which series should be omited (the endogenous variables) and which
series should be added (the external instruments).
```{r}
iv_cig <- expreg(cigarettes ~ habit + price + restaurant + income + age + age2 +
educ + educ2 + famsize + race | . - habit + age3 + educ3 +
educage + lagprice + reslgth, data = cigmales,
method = "iv")
gmm_cig <- update(iv_cig, method = "gmm")
```
The method argument unables to estimate either the instrumental
variables or the general method of moments estimator. The Sargan test gives:
<!-- The results are presented in the @tbl-cig. -->
<!-- ```{r} -->
<!-- #| label: tbl-cig -->
<!-- #| tbl-cap: "Cigarette smoking behaviour" -->
<!-- #| echo: false -->
<!-- #| message: false -->
<!-- if (requireNamespace("modelsummary")){ -->
<!-- modelsummary::msummary(list(ML = pois_cig, IV = iv_cig, GMM = gmm_cig), -->
<!-- fmt = 4, statistic = 'statistic', coef_omit = "(Intercept)") -->
<!-- } -->
<!-- ``` -->
```{r}
sargan(iv_cig) |> gaze()
sargan(gmm_cig) |> gaze()
```
# Birth weight
The second data set used by @MULL:97 consists on 1388 observations on
birthweight from the Child Health Supplement to the 1988 National
Health Interview Survey. The response is birthweight `birthwt` in
pounds and the covariates are the number of cigarettes smoked daily
during the pregnancy `cigarettes`, the birth order `parity`, a dummy
for white women `race` and child's sex `sex`. Smoking behaviour during
the pregnancy is suspected to be correlated with some other unobserved
"bad habits" that may be have a negative effect on
birthweight. Therefore, performing a pseudo-Poisson regression should
result in a upward bias in the estimation of the effect of smoking on
birthweight. The external instruments are the number of years of
education of the father `edfather` and the mother `edmother`, the
family income `faminc` and the per-pack state excise tax on
cigarettes.
```{r}
ml_bwt <- glm(birthwt ~ cigarettes + parity + race + sex, data = birthwt,
family = quasipoisson)
iv_bwt <- expreg(birthwt ~ cigarettes + parity + race + sex |
. - cigarettes + edmother + edfather + faminc +
cigtax, data = birthwt, method = "iv")
gmm_bwt <- update(iv_bwt, method = "gmm")
```
<!-- The results are presented in the @tbl-weight. -->
<!-- ```{r} -->
<!-- #| label: tbl-weight -->
<!-- #| tbl-cap: "Birth weight and smoking" -->
<!-- #| eval: false -->
<!-- #| echo: false -->
<!-- if (requireNamespace("modelsummary")){ -->
<!-- modelsummary::msummary(list(ML = ml_bwt, IV = iv_bwt, GMM = gmm_bwt), -->
<!-- fmt = 4, statistic = 'statistic', coef_omit = "(Intercept)") -->
<!-- } -->
<!-- ``` -->
```{r}
sargan(gmm_bwt)
```