Testing Exogeneity in the Bivariate Probit Model: A Monte Carlo Study*


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    The authors would like to thank the seminar partecipants at CEMAPRE (ISEG, Lisbon), ICEE 2005 congress (Venice), and University of Southampton for stimulating discussions. We are also grateful to Giorgio Calzolari, Daniele Fabbri and Joao Santos Silva for helpful comments.


We conduct an extensive Monte Carlo experiment to examine the finite sample properties of maximum-likelihood-based inference in the bivariate probit model with an endogenous dummy. We analyse the relative performance of alternative exogeneity tests, the impact of distributional misspecification and the role of exclusion restrictions to achieve parameter identification in practice. The results allow us to infer important guidelines for applied econometric practice.