Discrete factor approximations in simultaneous equation models: estimating the impact of a dummy endogenous variable on a continuous outcome.

This paper contains a Monte Carlo evaluation of estimators used to control for endogeneity of dummy explanatory variables in continuous outcome regression models. When the true model has bivariate normal disturbances, estimators using discrete factor approximations compare favorably to efficient estimators in terms of precision and bias; these approximation estimators dominate all the other estimators examined when the disturbances are non-normal. The experiments also indicate that one should liberally add points of support to the discrete factor distribution. The paper concludes with an application of the discrete factor approximation to the estimation of the impact of marriage on wages.