Testing the Correlated Random Coefficient Model
J. Heckman, D. Schmierer, and Sergio Urzua ,
( 158 )
Journal of Econometrics

The recent literature on instrumental variables (IV) features models in which agents sort into treatment status on the basis of gains from treatment as well as on baseline-pretreatment levels. Components of the gains known to the agents and acted on by them may not be known by the observing economist. Such models are called correlated random coefficient models. Sorting on unobserved components of gains complicates the interpretation of what IV estimates. This paper examines testable implications of the hypothesis that agents do not sort into treatment based on gains.

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