Finite Sample Bias In Iv Estimation Of Intertemporal Labor Supply Models: Is The Intertemporal Substitution Elasticity Really Small?

Chul-In Lee

The Review of Economics and Statistics, 2001, vol. 83, issue 4, 638-646

Abstract: The empirical literature on intertemporal labor supply behavior documents that the intertemporal elasticity of substitution of labor supply is very low, with a plausible range of zero to 0.2. Drawing upon the literature on the distribution of instrumental variables (IV) estimators, this paper demonstrates that this conventional wisdom is erroneous because it does not take into account the severe finite sample bias in these estimates that arise from weak instruments. This paper adopts several approaches to adjust for the problems induced by these weak instruments. The empirical results show that, when uncorrected for finite sample bias, the two-stage least-squares (2SLS) estimate of the elasticity is essentially zero, as in most of the previous studies, with its valid confidence interval being open-ended, [-∞, +∞]. However, when corrected for finite sample bias, the estimate becomes approximately 0.5 with a much tighter confidence interval. © 2001 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (39)

Downloads: (external link)
http://www.mitpressjournals.org/doi/pdf/10.1162/003465301753237722 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tpr:restat:v:83:y:2001:i:4:p:638-646

Ordering information: This journal article can be ordered from
https://mitpressjour ... rnal/?issn=0034-6535

Access Statistics for this article

The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu

More articles in The Review of Economics and Statistics from MIT Press
Bibliographic data for series maintained by The MIT Press ().