Collinearity and Two-Step Estimation of Sample Selection Models: Problems, Origins, and Remedies

Authors:
Siu Fai Leung;Shihti Yu
Affiliations:
Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong sfleung@ust.hk;Department of Economics, National Chung Cheng University, Chai-Yi, 621, Taiwan, R.O.C.
Venue:
Computational Economics
Year:
2000

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Abstract

This paper investigates the origins of the collinearity problems encounteredin the two-step estimation method for sample selection models. The analysisreveals several critical misconceptions and deficiencies in the literature.Remedies to the collinearity problems are proposed and evaluated. Monte Carloexperiments as well as an empirical example based on Mroz's (1987) data areused to illustrate the practical relevance and importance of the analysis.