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Estimating Tobit models for panel data with

autocorrelated errors
Giorgio Calzolari

Laura Magazzini

Paper submitted for presentation at ESEM 2008


(Milano, 27-31 August, 2008).
PRELIMINARY AND INCOMPLETE

.
Abstract
The performance of simulation-based estimators for panel data To-
bit models (censored regression) with random eects and autocorrelated
AR(1) errors is evaluated with Monte Carlo experiments. Examples show
that poor identiability of parameters can arise in this context when the
autocorrelation parameter is moderately high. An example of application
is provided on a model analysing the patent-R&D relationship.
1 Introduction
This paper aims at evaluating the performance of simulation-based estimation
techniques in the context of a Tobit model for panel data with autocorrelated
errors and random eects. The availability of panel data (i.e. repeated obser-
vations over time on the same unit) oers a great number of advantages for
estimation over single cross-section or time-series data. First, panel data allow
to control for time-invariant or unit-invariant characteristics, whose omission
can result in biased estimates in a cross-section or a time-series setting. Then,
the availability of repeated observations over the same unit allows answering
questions about the dynamic behaviour of economic variables that could not be
handled in a time-series or cross-section context.
Despite that, the application of limited dependent variable models to panel data
has been hampered by the intractability of the likelihood function, that contains
integrals with no closed form solution, unless restrictive (and not realistic) hy-
potheses are imposed on the structure of the model.

Department of Statistics, Universit`a di Firenze, <calzolar@ds.uni.it>

Department of Economics, Universit`a di Verona, <laura.magazzini@univr.it>

We gratefully acknowledge suggestions from C. Rampichini, E. Sentana, G. Fiorentini,


DM. Drukker, A. Gottard, D. Lubian, MJ. Lombardi, but retain full responsability for the
contents of this paper.
1
Simulation-based estimation procedures, developed in recent years, oer a sim-
ple solution to the problem, making it feasible to estimate models with in-
tractable objective functions. These methods have initially been applied for the
estimation of models with multi-dimensional integrals in the likelihood equations
or moment conditions (as it is in our eld of investigation), due, for example,
to the trasformation of a latent-variable model in a model that describes the
observed data, or to the presence of missing data, or in models where random
coecients or heterogeneity factors are considered.
We will consider the method of indirect estimation (Gourieroux, Monfort and
Renault 1993, Smith Jr 1993, Gallant and Tauchen 1996) and simulated maxi-
mum likelihood (Lerman and Manski 1981, Pakes 1986).
The simulated maximum likelihood method replaces the (intractable) likelihood
function with an approximation obtained with simulations. As a result, the
objective function is computationally tractable and can be used to obtain the
parameter estimates.
On the contrary, indirect estimation makes use of an auxiliary model, that can
be easily estimated, and calibrates the structural parameters in order to have
similar characteristics of the observed endogenous variables and of the values
obtained via simulation of the structural model.
In a previous work (Calzolari, Magazzini and Mealli 2001), the performance
of the simulation methods has been highlighted in the context of Tobit model
for panel data with uncorrelated disturbances. Autocorrelation of disturbances
introduces additional diculties which are treated in this paper.
As an alternative, a xed eect approach might be considered. Till recent years,
application of the xed eect limited dependent variable models for panel data
has been limited, due to the well-known incidental parameter problem (Ney-
man and Scott 1948). Inconsistency in the estimates of the xed eects (that,
in the limited dependent variable case cannot be removed by transforming the
data) leads to inconsistent estimates of the variable coecients. Alternative
estimators for reducing the bias have been proposed (see Arellano and Hahn
(2005) for a review). In the case of the censored regression model, Greene
(2004) shows that, dierently from probit and logit models, the estimation of
the location coecients is consistent, whereas inconsistency emerges in the es-
timation of the variance components, with implications for the estimation of
standard errors and marginal eects. As an advantage over the random eect
specication, estimation in the xed eect models do not rely on the assump-
tion of independence between the individual eects and the variables included
in the regression. Nonetheless, dependency can be modeled and the random ef-
fect specication can be adjusted in order to take into account the relationship
between the individual eects and the exogenous variables (Chamberlain 1980).
The paper proceeds as follows. In the next section we describe the econometric
model. Section 3 discusses the application of simulation method to this setting,
whereas Section 4 provides the results of a preliminary Monte Carlo experiment.
Section 5 presents an application of the method for the study of the patent-R&D
relationship. Section 6 summarizes our ndings.
2
2 The random eect Tobit model (panel data)
The rst application of the censored regression model dates back to 1959, when
Tobin (1958) analyzed the level of expenditure on durable goods. Other applica-
tions have been developed in the eld of labor participation, for the analysis of
the number of hours at work, where the dependent variable is set to zero when
the person is not employed. All in all, the Tobit model, or censored regres-
sion model, can be used when a large number of observation on the dependent
variable assumes the value zero (or some other limiting value).
The data generating process can be thought of in terms of a latent variable
crossing a threshold. The variable of interest is observed only if it lies within
a certain range, otherwise the observation is censored and the limiting value is
reported. Without loss of generality we will set the limiting value to zero.
The latent variable, y

it
, is expressed as a linear function of a set of independent
variables, X
it
, and an error term,
it
:
y

it
= X

it
+
it
(1)
where i denotes the unit (household, rm, country, ...), and the index t denotes
the time, with i = 1, ..., N; t = 1, ..., T.
Observation on the dependent variable is driven by the following rule: y
it
=
max{0, y

it
}, i.e. the dependent variable is observed only if non negative, oth-
erwise a zero is recorded. As a result, the likelihood function for the whole
observed vector y is a mixture of discrete and continous distributions.
When analysing panel data, the error structure can be decomposed into three
independent terms:

it
=
i
+
t
+ e
it
(2)
where
i
is the individual eect, representing all the time-invariant (unobserved
or unobservable) characteristics of unit i,
t
is the time eect, representing all
the characteristics of time t, invariant across all the cross-sectional units in the
sample, and e
it
is a random term that varies over time and individuals.
In standard settings, the error term e
it
is assumed to be serially uncorrelated.
This assumption is not suited to situations where the eect of unobserved vari-
ables vary sistematically over time, as in the case of serially correlated omitted
variables or transitory variables whose eect last more than one period. Recent
research in linear models with random eects is considering serial correlation in
the time dimension (Karlsson and Skoglund 2004). Rather, we consider distur-
bances that are correlated over time, produced by an AR(1) process:
e
it
= e
i,t1
+ w
it
(3)
with w
it
omoschedastic, uncorrelated, and with mean zero. The error term
t
is not considered in the analysis, since it can be easily accounted for in a typical
(short-T) panel setting by inserting time-dummies in the regression.
3
As a result of these assumptions, the variance-covariance matrix of the error
term
it
has the following structure:
E[
it

js
] =
_
_
_

+
2
e
if i = j, t = s

+
|ts|

2
e
if i = j, t = s
0 if i = j
(4)
Autocorrelated disturbances in panel data linear models with random eects
have been considered for the rst time by Lillard and Willis (1978). The authors
estimate the model parameters by rst applying OLS on the data pooled over
individuals and years, and then the variance components and the autocorrelation
parameter are estimated by applying maximum likelihood to the OLS residuals.
If data are not censored, estimation can be easily handled both in the random
and xed eect approaches
1
.
Diculties arise when observations on the dependent variable are censored.
Even if a single time series is considered, maximum likelihood estimation of
the autocorrelated models require the evaluation of multiple integrals (Zeger
and Brookmeyer 1986). If the time dimension is suciently small, the integral
may not be dicult to compute, and in special cases the likelihood can be
decomposed into the product of unidimensional integrals. Consistent estimates
may be also obtained ignoring serial correlation, and treating the observations as
independent (Robinson 1982). However, alternative estimation procedures have
been devised which are shown to perform better than the estimator obtained
by ignoring serial correlation (Dagenais 1989).
In the case of panel data, the issue is further complicated by the introduction of
individual eects, that allow to capture the eect of unit-specic unobservables
or unobserved heterogeneity, therefore reducing the omitted variable bias that
might arise in time-series or cross-section analysis.
Empirical studies have already analyzed the Tobit model with random eect and
autocorrelated disturbances where the problem of intractability of the likelihood
function has been solved by the application of simulated maximum likelihood.
However, to our knowledge, a Monte Carlo experiment evaluating the perfor-
mance of the estimator is still lacking.
Hajivassiliou (1994) applies simulation technique for the estimation of the inci-
dence and extent of external nancing crises of developing countries, allowing
exible correlation structure in the unobservables. Both multiperiod Tobit and
probit models are considered and the author assumes a one-factor plus AR(1)
structure, whose coecients are estimated via smoothly simulated maximum
likelihood (based on a smooth recursive conditioning simulator) and via the
method of simulated scores (based both on a smooth recursive conditioning
simulator and on a Gibbs sampling simulator).
More recently, Schmit, Gould, Dong, Kaiser and Chung (2003) consider panel
data on household cheese purchases to examine the impact of U.S. generic cheese
1
See Bhargava, Franzini and Narendranathan (1982) for the discussion of autocorrelated
models within the linear xed eect framework.
4
advertising on at-home consumption. The model accounts for the panel and cen-
sored nature of the data, as well as for an autoregressive error structure. The
problem of high-order integrals appearing in the likelihood function is solved
using techniques for simulating the probabilities and partitioning the data, ex-
tending the procedure proposed by Zeger and Brookmeyer (1986) for the analysis
of censored autocorrelated data. The authors have applied the methodology also
in a study of the purchase process for frequently purchased commodity (Dong,
Schmit, Kaiser and Chung 2003).
3 Simulation-based estimation
Simulation-based estimation allows us to overcome the problem of intractability
of the likelihood function. Two approaches are considered and compared: (con-
strained) indirect estimation and simulated maximum likelihood, employing the
Geweke-Hajivassiliou-Keane, henceforth GHK, simulator (see e.g. Hajivassiliou
and McFadden, 1998 for details).
Early research on the one-way Tobit model with no autocorrelation showed that
simulation-based estimation performs well enough for estimation (Calzolari et al.
2001).
3.1 Indirect Estimation
Indirect estimation methods
2
represent an inferential approach which is suitable
for situations where the estimation of the statistical model of interest is too dif-
cult to be performed directly, while it is straightforward to produce simulated
values from the same model. It was rst motivated by econometric models with
latent variables, but it can be applied in virtually every situation in which the
direct maximization of the likelihood function turns out to be dicult.
The principle underlying the so-called Ecient Method of Moments, henceforth
EMM, (Gallant and Tauchen 1996) is as follows. Suppose we have a sample
of observations y and a model whose likelihood function L(y; ) is dicult to
handle and maximize.
3
The maximum likelihood estimate of , given by

= arg max

lnL(; y),
is thus unavailable. Let us now take an alternative model, depending on a
parameter vector B, which will be indicated as auxiliary model, easier to
handle, and suppose we decide to use it in the place of the original one. Since
the model is misspecied, the quasi-ML (or pseudo-ML) estimator

= arg max
B
ln

L(; y),
is not necessarily consistent: the idea is to exploit simulations performed under
the original model to correct for inconsistency.
2
See, for a general treatment, the fourth chapter of Gourieroux and Monfort (1996).
3
We remark that the model could also depend on a matrix of explanatory variables X.
5
One now simulates a set of S vectors from the original model on the basis of an
arbitrary parameter vector

, and denotes each one of those vectors as y
s
(

).
Of course, using observed data y, the score function of the auxiliary model:
ln

L(; y)

, (5)
is zero when evaluated at the quasi-maximum likelihood estimate

. However,
using simulated y
s
(

), the score at the same parameter value



is usually not
zero. The idea is to make the score as close as possible to zero, minimizing
_
_
_
S

s=1
ln

L[; y
s
()]

_
_
_

_
_
_
S

s=1
ln

L[; y
s
()]

_
_
_
, (6)
where is a symmetric nonnegative denite matrix dening the metric.
4
This
approach is especially useful when a closed form expression for the score of the
auxiliary model is available. In this case, the procedure is computationally faster
than other indirect estimation procedures, like indirect inference (Gourieroux
et al. 1993) that would require iterated numerical re-estimation of the auxiliary
model. In our specic case the score is available in closed form.
3.1.1 Constrained indirect estimation
The estimation of the auxiliary model needs to incorporate inequality con-
straints to rule out negative variances and autocorrelation parameter greater
than 1, but also to avoid poorly identied regions of the parameter space of the
auxiliary model. Indirect estimation in the presence of constraints is examined
in Calzolari, Fiorentini and Sentana (2004): rather than the quasi-likelihood of
the auxiliary model, one has to consider the Lagrangian function
(; y) = ln

L(; y) + r

(), (7)
where r is the functional vector containing the restrictions, are the multipliers
and = (

.
Assuming that both the log likelihood function and the vector of constraints are
twice continuously dierentiable with respect to , the latter with a Jacobian
matrix r

()/ whose rank coincides with the number of eective constraints,


the rst-order conditions that take into account the constraints will be given
by:
(; y)

=
ln

L(; y)

+
r

()

= 0. (8)
Under the constraints, the quadratic form (6) to be minimized thus becomes
_
[; y
s
()]

_
[; y
s
()]

_
, (9)
4
Details on how to obtain an optimal weighing matrix can be found in Gallant and Tauchen
(1996).
6
which is not more complex than (6) if we consider that the second term of (8)

()

does not depend on simulated data and is therefore equal to the score of the
quasi-likelihood computed at

with observed data. It is thus equal to zero if
the restrictions are not binding, and dierent from zero in case they are.
To wrap up, in our specic case, we will conduct constrained EMM with non-
negativity constraints for
2

and
2
e
and an upper bound (of course < 1) for
||. It is important to remark (Calzolari et al. 2004) that when clashes on
its upper bound, the information on will be contained in the Kuhn-Tucker
multiplier

=
ln

L(; y)

;
therefore a by-product of the constrained approach will be to eschew the poor
identication problem arising when is close to 1, as it will be explained in the
next section.
The procedure is implemented in Fortran 77.
3.1.2 The auxiliary model
We use, as auxiliary model, the same model of interest (1), where we treat the
censoring process as a random cancellation process, independent from the data.
In other words, the missing variables are simply disregarded, as if missingness
was ignorable. This implies a misspecication, since missingness is not at all
ignorable in a Tobit model: thus, parameters estimated applying quasi-ML to
the auxiliary model will be biased (inconsistent). Correcting the bias is the
purpose of the indirect estimation procedure. In addition, there will be an
obvious loss of eciency (not cured by the indirect estimation procedure) due
to the complete cancellation of the censored values.
If no censoring occurs, the (T T) covariance matrix of the ith individual
error terms is
= Cov(
i
) =
2

+
2
e
Corr() (10)
where is a (T 1) vector of elements = 1, and Corr() is the (T T) correlation
matrix of an AR(1) process with coecient .
Thus, the contribution of the ith individual data to the log-likelihood is

1
2
ln||
1
2
(y
i
X
i
)

1
(y
i
X
i
)
When some observations are cancelled, the vector, still indicated as y
i
X
i
,
is compacted (thus it has less than T elements), and compacted is also the
matrix, after rows and columns corresponding to the cancelled data are dropped:

i
will be the resulting matrix. The contribution to the log-likelihood of the
not cancelled data of the ith individual data is

1
2
ln|
i
|
1
2
(y
i
X
i
)

1
i
(y
i
X
i
)
7
3.1.3 Identiability and poor identication
Still in absence of censoring, if T = 2 the covariance matrix would be
= Cov(
i
) =
_

2

+
2
e

2

+
2
e

+
2
e

2

+
2
e
_
(11)
thus it contains only two independent elements, from which it is impossible to
identify separately the three parameters of the auxiliary model
2

,
2
e
and .
If T = 3, then the covariance matrix would be
= Cov(
i
) =
_

+
2
e

2

+
2
e

2

+
2
e

+
2
e

2

+
2
e

2

+
2
e

+
2
e

+
2
e

2

+
2
e
_

_
(12)
where the independent elements are three, making identication possible.
Of course the situation becomes even better for larger values of T.
In practice, however, identication can be very poor when is moderately high,
even for values that would not be considered dangerously close to 1 in a time
series context. Some numerical examples could well exemplify the problem.
Let be T = 4,
2

= 35,
2
e
= 5 and = 0.9. The covariance matrix is
40.00 39.50 39.05 38.65
39.50 40.00 39.50 39.05
39.05 39.50 40.00 39.50
38.65 39.05 39.50 40.00
and the logarithm of its determinant is 3.664.
Let however be
2

= 20,
2
e
= 20 and = 0.975. In this case the covariance
matrix is
40.00 39.50 39.01 38.54
39.50 40.00 39.50 39.01
39.01 39.50 40.00 39.50
38.54 39.01 39.50 40.00
and the logarithm of its determinant is 3.670.
Finally, if
2

= 5,
2
e
= 35 and = 0.9857, the covariance matrix is
40.00 39.50 39.01 38.52
39.50 40.00 39.50 39.01
39.01 39.50 40.00 39.50
38.52 39.01 39.50 40.00
and the logarithm of its determinant is 3.673.
Of course, the matrices and the corresponding determinants are not equal, but
quite close to each other, thus suggesting that an estimation procedure would
8
not reach convergence in a simple or straightforward way. It would be necessary
to have larger values of T (so that higher powers of could make the dier-
ence), or a very large number of observations to ensure reliable (and meaningful)
estimation results.
Just one more example, to stress the point of poor identication.
2

= 9,
2
e
= 1
and = 0.9082, produce this covariance matrix
10.00 9.91 9.82 9.75
9.91 10.00 9.91 9.82
9.82 9.91 10.00 9.91
9.75 9.82 9.91 10.00
very close to the matrix that would be produced by
2

= 5,
2
e
= 5 and
= 0.98205
10.00 9.91 9.82 9.74
9.91 10.00 9.91 9.82
9.82 9.91 10.00 9.91
9.74 9.82 9.91 10.00
It is quite unlikely that censoring can help identication. For this reason, our
rst set of Monte Carlo experiments will use moderately low values of (till
0.7). Experiments with larger values of are in progress.
3.2 Simulated Maximum Likelihood
The likelihood function for the panel data Tobit model with random eects and
autocorrelated disturbances can be written as:
L =
N

i=1
L
i
(y
i
) =
N

i=1
_
{y

i
|yi=max(0,y

i
)}

T
(y

i
X

i
; )dy

i
(13)
where L
i
(y
i
) represents the likelihood function for the i-th unit (i = 1, ..., N),
and
T
is the T-variate normal density with mean zero and variance covariance
matrix , given in (10). Let us indicate with y
i0
the censored observation for
unit i, and with y
i1
the uncensored (positive) observation for unit i.
We can distinguish three cases:
1. All the observations for unit i are positive. In this case no problem arises
for computing the contribution to the likelihood of unit i which is equal
to L
i
=
T
(y
i
X

i
; ).
2. All the observations for unit i are equal to zero. The contribution to the
likelihood of unit i is equal to L
i
=
T
(X

i
; ), where a T-fold integral
needs to be evaluated. The GHK simulator
5
is used for the evaluation of
the normal probabilities.
5
The algorithm was the most reliable among those examined by Hajivassiliou, McFadden
and Ruud (1996). See e.g. Hajivassiliou and McFadden (1998) for details.
9
3. Observations for unit i display both positive and zero values. We par-
tition the T observations of unit i into two mutually exclusive sets: one
containing the censored observation, indexed by i0, and one containing
the uncensored observations, indexed by i1: T = T
i0
+ T
i1
. As a result,
L
i
can be decomposed into
L
i
(y
i
) = L
i
(y
i0
, y
i1
) =
Ti1
(y
i1
X

i1
;
1
)
Ti0
(X

i0
|y
i1
;
0|1
).
The log-likelihood is composed of two term: one (
Ti1
) has a closed form
expression, and the second one (
Ti0
) is the multinomial probability that
all components of {y
i0
} are zero (i.e. the components of {y

i0
} are nega-
tive), conditioning on the set {y
i1
}. The GHK simulator is employed for
the evaluation of integrals of dimension higher than 1 (i.e. if T
i0
> 1, oth-
erwise
Ti0
requires the evaluation of a one-dimensional integral, posing
no computational problems).
The major drawback of this estimation method is its inconsistency when the
number of pseudo-random values used to approximate the likelihood function
is xed. This is due to the fact that the likelihood function is approximated,
whereas the log-likelihood is maximized. However, the simulated maximum
likelihood estimator has the same performance as maximum likelihood estimator
if the number of observations (in our case N T) and the number of simulated
pseudo-random values (S) tend to innity in a way that

N T/S tends to
zero.
4 Monte Carlo results
To study the properties of these methods, we perform a simulation study and
apply the methods to the pseudo-observed data produced by simulation of the
data generating process.
We considered the following equation:
y

it
=
0
+
1
X
it
+
it
(14)
Observations are censored, since y

it
is observed only if it is greater than 0, it is
0 otherwise. X
it
were generated i.i.d. N(6, 4).
In the set of experiments discussed in this paper,
1
is set equal to 2, and the
intercept equals -12, corresponding to approximately 50% of censored observa-
tions.
The error term is obtained as:

it
=

i
+ e
it
(15)
with e
it
= e
i,t1
+
w
w
it
, w
it
i.i.d. N(0, 1), and
2
w
=
2
e
(1
2
).
Each estimation considered N = 500 and T = 10 for a total of 5000 observa-
tions. As an example, the sample can resemble a panel of rms or a sample of
households observed over a 10-year time period (approximately the number of
10

0

1

2


2
e
True values -12.00 2.000 1.000 1.000
Results of indirect estimation
MC mean -12.01 2.001 0.9973 1.003
MC var. 0.2423e-1 0.3391e-3 0.6968e-2 0.1407e-2
Results of maximum likelihood (Gauss-Hermite quadrature)
MC mean -12.00 2.001 0.9969 1.002
MC var. 0.8926e-2 0.1193e-3 0.2346e-2 0.3847e-3
Indirect estimation: mean and var. of 1000 MC replications.
Max. Lik.: mean and var. of 100 MC replications.
Estimation by Gauss-Hermite quadrature (25 points) is obtained in STATA.
Table 1: Results of Monte Carlo experiments uncorrelated error terms.
observations in our empirical application; see Section 5). For indirect estima-
tion we used S = 10, thus 50000 simulated observations are used to compute
the score of the quasi-likelihood.
Three true values of are used in the experiments: 0, 0.5, 0.7. Experiments
with larger values of are still in progress (they need a careful use of the
constraints to reduce the problems of poor identication of the auxiliary model
parameters). In each experiment 1000 Monte Carlo replications are performed,
and means and variances of estimated parameters are displayed in Table 2. The
results for the case of = 0 in Table 2 allow the comparison with the same
estimation method applied to the model without autocorrelation (Table 1).
In the case of simulated likelihood S is set to 75 (results at the bottom of Table
2). Due to large increases in computational times, the method of simulated
likelihood is evaluated on the basis of 100 Monte Carlo replications. Results
will be extended before Conference time.
Some considerations can be derived from the results of Tables 1 and 2.
1. When results with both methods are available, Maximum Likelihood (with
Gauss-Hermite quadrature or simulated) has variances between one third and a
half of the corresponding variances of indirect estimation parameters. Roughly
speaking, this is more or less what we might expect, since indirect estimation
has completely ignored the censored values (about a half of the total).
2. Indirect estimation gets rid of the bias due to misspecication of the auxiliary
model. This is obtained with a considerable reduction of the computational costs
with respect to Maximum Likelihood.
3. (Work in progress, no result displayed yet) Use of the constrained indirect
procedure may help in producing reasonable results, when a large value of the
autocorrelation parameter causes poor identication of the auxiliary model.
11

0

1

2


2
e

Results of indirect estimation
True values -12.00 2.000 1.000 1.000 0.0000
MC mean (a.m.) -10.49 1.829 0.8849 0.9186 -0.1834e-2
MC mean (m.i.)
a
-11.99 1.999 1.002 1.002 0.1451e-2
MC var. (m.i.) 0.2309e-1 0.3044e-3 0.9585e-2 0.1751e-2 0.1935e-2
True values -12.00 2.000 1.000 1.000 0.5000
MC mean (a.m.) -10.74 1.858 0.9328 0.9131 0.4669
MC mean (m.i.) -11.99 2.000 1.002 1.003 0.5000
MC var. (m.i.) 0.1768e-1 0.2355e-3 0.1304e-1 0.3705e-2 0.1257e-2
True values -12.00 2.000 1.000 1.000 0.7000
MC mean (a.m.) -10.98 1.886 0.9948 0.9005 0.6651
MC mean (m.i.) -11.99 2.002 1.000 1.011 0.6992
MC var. (m.i.) 0.1519e-1 0.1915e-3 0.2064e-1 0.9426e-2 0.1091e-2
True values -12.00 2.000 5.000 5.000 0.0000
MC mean (a.m.) -7.347 1.518 3.070 3.873 -0.4718e-3
MC mean (m.i.)
b
-12.01 2.000 5.044 5.014 0.1413e-2
MC var. (m.i.) 0.1386 0.1450e-2 0.4040 0.6150e-1 0.2615e-2
True values -12.00 2.000 5.000 5.000 0.5000
MC mean (a.m.) -7.936 1.590 3.394 3.814 0.4054
MC mean (m.i.) -12.01 2.000 5.055 5.020 0.4996
MC var. (m.i.) 0.1235 0.1119e-2 0.5727 0.1216 0.1557e-2
True values -12.00 2.000 5.000 5.000 0.7000
MC mean (a.m.) -8.529 1.664 3.827 3.679 0.5992
MC mean (m.i.) -12.02 2.000 5.052 5.055 0.6997
MC var. (m.i.) 0.1309 0.8381e-3 0.9111 0.3026 0.1329e-2
Results of simulated maximum likelihood estimation
True values -12.00 2.000 1.000 1.000 0.7000
MC mean -12.01 2.000 1.002 1.008 0.7006
MC var. 0.9927e-2 0.1182e-3 0.1005e-1 0.4916e-2 0.5420e-3
m.i.: model of interest; a.m.: auxiliary model.
a
The algorithm did not converge in 8 cases.
b
The algorithm did not converge in 4 cases.
Indirect estimation: mean and var. of 1000 MC replications.
Simulated Max. Lik.: mean and var. of 100 MC replications.
Table 2: Results of Monte Carlo experiments, autocorrelated error terms.
12
5 An application to the patent-R&D relation-
ship
Innovation and technological change are largely recognized as the main drivers
of long-term economic growth. Despite that, the empirical account of the dy-
namic relationship between the inputs and outputs of technological activities is
hindered by the diculties in devising indicators that can proxy in a consistent
and systematic way the inputs and the outputs of the technological activities.
Against this background, the literature on the source of technological growth
has relied on the level of R&D expenditure as a proxy for R&D input, and there
is increasing acknowledgment of the idea that patents can be fruitfully employed
as a proxy for R&D output (Griliches 1990, Jae and Trajtenberg 2002, Cincera
1997).
Most available empirical studies rely on count data models for investigating the
relationship between patents and (log)R&D (Hall, Griliches and Hausman 1986,
Hausman, Hall and Griliches 1984, Cincera 1997). Even though patent data can
only take integer values, the variable lies on a large support
6
, allowing also the
estimation of a linear model. Nonetheless, a large proportion of observations
report zero patent, therefore the censored regression model is more appropriate.
We apply the proposed methodology to the data employed by Hall et al. (1986),
which cover information about the patenting and R&D activity of a sample of
346 US manufacturing rms over the period 1970-1979
7
. Additional information
are available for a larger set of rms but on a more limited time frame (642 US
manufacturing rms observed over the period 1972-1979). The model considers
the number of patents as a function of log R&D expenditure. Since the analysis
of Hall et al. (1986) reveals that R&D and patents appear to be dominated by a
contemporaneous relationship with little eect of leads and lags, we only focus
on contemporaneous relationship, considering the possibility of autocorrelation
of the error terms.
Estimates obtained by indirect estimation and simulated maximum likelihood
are reported in Table 3.
Computation of standard errors is in progress, and presumably it will help
explaining the dierence in the estimated coecients, particularly the coecient
of LogR, which is the variable of primary interest. However, the estimated
shows that substantianl correlation (about 0.7) exists across the error terms in
our data.
6 Summary
This paper has shown the performance of simulated estimators in the context
of the Tobit model with random eects and autocorrelated disturbances.
6
In Cincera (1997) the number of patents applied for by a rm ranges from 0 to 925,
whereas in Hall et al. (1986) the maximum number of patent is 831.
7
In a future version of the paper we will also take into consideration the data analysed by
Cincera (1997).
13
Sample 1 Sample 2
Variable N = 346, T = 10 N = 642, T = 8
Indirect Estimation
Constant -159.1 -181.2
Scientic sector 15.05 16.70
LogK 14.24 12.66
LogR 39.54 41.86

4418. 5348.

2
e
162.6 332.3
0.8190 0.7629
Simulated Maximum Likelihood
Constant -47.75 -43.24
Scientic sector 17.91 14.41
LogK 17.20 16.47
LogR 5.63 3.17

4443 4443

2
e
589.4 300.6
0.7610 0.6430
% censored 17.49 22.88
Table 3: Estimation results
Monte Carlo experiments hightlight the good performance of the methods in
this context. A problem of poor identiability arises in this context for values of
the autocorrelation parameter that are moderately high. Constrained indirect
estimation is proposed as a tool for solving the problem.
An example of application is presented for the analysis of the patent-R&D re-
lationship. High autocorrelation (about 0.7) is estimated.
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