Testing the Specification in Random Coefficient Models

Christoph Breunig (Humboldt-Unverisität zu Berlin)
Wednesday, July 8, 2015 - 10:00am
WIAS, Erhard-Schmidt-Saal, Mohrenstraße 39, 10117 Berlin

In this talk, we suggest and analyze a new class of specification tests for random coefficient models. They allow to assess the validity of central structural features of the model, in particular linearity in coefficients, generalizations of this notion like a known nonlinear functional relationship, or degeneracy of the distribution of a random coefficient, i.e., whether a coefficient is fixed or random, including whether an associated variable can be omitted altogether. Our tests are nonparametric in nature, and use sieve estimators of the characteristic function. We analyze both their power against global, as well as against local alternatives, theoretically. Moreover, we perform a Monte Carlo simulation study, and apply the tests to analyze the degree of nonlinearity in a heterogeneous random coefficients consumer demand model.