Advanced Econometrics Takeshi Amemiya

Model of Kenny, Lee, Maddala, and Trost

Kenny et al. (1979) tried to explain earnings differentials between those who went to college and those who did not. We shall explain their model using the variables appearing in (10.9.1). In their model, у f refers to the desired years of college education, yf to the earnings of those who go to college, and yf to the earnings of those who do not go to college. A small degree of simultaneity is introduced into the model by letting yf appear in the right-hand side of the yf equation. Kenny and his coauthors used the MLE. They noted that the MLE iterations did not converge when started from the LS estimates but did con­verge very fast when started from Heckman’s two-step estimates (simulta­neous equations version).