September 2010

IZA DP No. 5205: Tests of Hypotheses Arising in the Correlated Random Coefficient Model

published in: Economic Modelling, 2010, 27 (6), Special Issue: P.A.V.B Swamy, 1355-1367

This paper examines the correlated random coefficient model. It extends the analysis of Swamy (1971, 1974), who pioneered the uncorrelated random coefficient model in economics. We develop the properties of the correlated random coefficient model and derive a new representation of the variance of the instrumental variable estimator for that model. We develop tests of the validity of the correlated random coefficient model against the null hypothesis of the uncorrelated random coefficient model.