Basic Misspecification Testing and Respecification
The Cross-Sectional Case
In this chapter we test for and correct (if needed) misspecification issues (1), (2), (4), and (5) from Chapter 1 specifically for cross-sectional cases. Issue (3) isn’t addressed in this chapter because it only applies to models that use panel data. The algorithm outlined in this chapter (and for the panel models later on in the book) is one developed by myself over years of performing empirical research, analyzing other authors’ research, and publishing many articles that address the topic of model specification.
The reason I call the step-by-step process an algorithm is because it can be recursive in nature. Many of the misspecifications listed in 1 through ...
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