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Imposing Observation-Varying Equality Constraints Using Generalised Restricted Least Squares

Alicia Rambaldi (), Christopher O'Donnell and Howard E.Doran
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Howard E.Doran: School of Economics, The University of Queensland, http://www.uq.edu.au/economics

No 323, Discussion Papers Series from University of Queensland, School of Economics

Abstract: Linear equality restrictions derived from economic theory are frequently observation-varying. Except in special cases, Restricted Least Squares (RLS) cannot be used to impose such restrictions without either underconstraining or overconstraining the parameter space. We solve the problem by developing a new estimator that collapses to RLS in cases where the restrictions are observation-invariant. We derive some theoretical properties of our so-called Generalised Restricted Least Squares (GRLS) estimator, and conduct a simulation experiment involving the estimation of a constant returns to scale production function. We find that GRLS significantly outperforms RLS in both small and large samples.

Date: 2003
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