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# ch16 - Simultaneous Equations y1 = 1y2 1z1 u1 y2 = 2y1 2z2...

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Economics 20 - Prof. Anderson 1 Simultaneous Equations y 1 = α 1 y 2 + β 1 z 1 + u 1 y 2 = α 2 y 1 + β 2 z 2 + u 2

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Economics 20 - Prof. Anderson 2 Simultaneity Simultaneity is a specific type of endogeneity problem in which the explanatory variable is jointly determined with the dependent variable As with other types of endogeneity, IV estimation can solve the problem Some special issues to consider with simultaneous equations models (SEM)
Economics 20 - Prof. Anderson 3 Supply and Demand Example Start with an equation you’d like to estimate, say a labor supply function h s = α 1 w + β 1 z + u 1 , where w is the wage and z is a supply shifter Call this a structural equation – it’s derived from economic theory and has a causal interpretation where w directly affects h s

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Economics 20 - Prof. Anderson 4 Example (cont) Problem that can’t just regress observed hours on wage, since observed hours are determined by the equilibrium of supply and demand Consider a second structural equation, in this case the labor demand function h d = α 2 w + u 2 So hours are determined by a SEM
Economics 20 - Prof. Anderson

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ch16 - Simultaneous Equations y1 = 1y2 1z1 u1 y2 = 2y1 2z2...

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