The control function approach is a convenient method of estimation in simultaneous equation systems. This requires that the system can be expressed in triangular form with variables satisfying a conditional mean independence restriction. Linear simultaneous models with additive errors can always be expressed in this form. However, in nonlinear nonadditive simultaneous systems, conditional independence requires a strong additional restriction known as control function separability. We argue that nonadditive models are a key characteristic of simultaneous models of economic behavior with unobserved heterogeneity. We review alternative "system" approaches and document the biases that occur when the control function approach is used inappropriately.
Authors
Richard Blundell
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Rosa Matzkin
UCLA
Dennis Kristensen
Journal article details
- DOI
- 10.1257/aer.103.3.563
- Publisher
- American Economic Association
- Issue
- May 2013
Suggested citation
R, Blundell and D, Kristensen and R, Matzkin. (2013). 'Control Functions and Simultaneous Equations Methods' (2013)
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