The Specification of Dynamic Discrete-Time Two-State Panel Data Models
Motu Working Paper No. 16-01
61 Pages Posted: 27 Feb 2016
Date Written: February 10, 2016
This paper examines dynamic binary response and multi-spell duration model approaches to analyzing longitudinal discrete-time binary outcomes. Prototypical dynamic binary response models specify low-order Markovian state dependence and restrict the effects of observed and unobserved heterogeneity on the probability of transitioning into and out of a state to have the same magnitude and opposite signs. In contrast, multi-spell duration models typically allow for state-specify c duration dependence, and allow the probability of entry into and exit from a state to vary flexibly. We show that both of these approaches are special cases within a general framework. We compare specific dynamic binary response and multi-spell duration models empirically using a case study of poverty transitions. In this example, both the specification of state dependence and the restrictions on the state-specific transition probabilities imposed by the simpler dynamic binary response models are severely rejected against the more flexible multi-spell duration models. Consistent with recent literature, we conclude that the standard dynamic binary response model is unacceptably restrictive in this context.
Keywords: Panel data, transition data, binary response, duration analysis, event history analysis, initial conditions, random effects
JEL Classification: C33, C35, C41, C51
Suggested Citation: Suggested Citation