Tests of exogeneity in duration models with censored data

Abstract

Consider the setting in which a researcher is interested in the causal effect of a treatment $Z$ on a duration time $T$, which is subject to right censoring. We assume that $T=\varphi(X,Z,U)$, where $X$ is a vector of baseline covariates, $\varphi(X,Z,U)$ is strictly increasing in the error term $U$ for each $(X,Z)$ and $U\sim \mathcal{U}[0,1]$. Therefore, the model is nonparametric and nonseparable. We propose nonparametric tests for the hypothesis that $Z$ is exogenous, meaning that $Z$ is independent of $U$ given $X$. The test statistics rely on an instrumental variable $W$ that is independent of $U$ given $X$. We assume that $X,W$ and $Z$ are all categorical. Test statistics are constructed for the hypothesis that the conditional rank $V_T= F_{T \mid X,Z}(T \mid X,Z)$ is independent of $(X,W)$ jointly. Under an identifiability condition on $\varphi$, this hypothesis is equivalent to $Z$ being exogenous. However, note that $V_T$ is censored by $V_C =F_{T \mid X,Z}(C \mid X,Z)$, which complicates the construction of the test statistics significantly. We derive the limiting distributions of the proposed tests and prove that our estimator of the distribution of $V_T$ converges to the uniform distribution at a rate faster than the usual parametric $n^{-1/2}$-rate. We demonstrate that the test statistics and bootstrap approximations for the critical values have a good finite sample performance in various Monte Carlo settings. Finally, we illustrate the tests with an empirical application to the National Job Training Partnership Act (JTPA) Study.