International Edition Econometric Analysis

1 The editorial team at Pearson has worked closely witheducators around the globe to inform students of the ever-changing world in a broad variety of Education offers this product to theinternational market, which may or may not includealterations from the United States version. InternationalEditionInternational EditionThis is a special Edition of an established titlewidely used by colleges and universitiesthroughout the world. Pearson published thisexclusive Edition for the benefit of studentsoutside the United States and Canada. If youpurchased this book within the United Statesor Canada you should be aware that it hasbeen imported without the approval of thePublisher or the International Edition GreeneEconometric AnalysisInternational EditionSeventh EditionEconometricAnalysisSeventh EditionWilliam H.

2 GreeneGreene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120:15 SEVENTH EDITIONECONOMETRIC ANALYSISINTERNATIONAL EDITIONQW illiam H. GreeneNew York UniversityGreene-2140242A01 GREE3568 07 GE FMFebruary 16, 201115:22 For Margaret and Richard GreeneEditorial Director:Sally YaganSenior Manufacturing Buyer:Carol MelvilleEditor in Chief:Donna BattistaCreative Director:Christy MahonAcquisitions Editor:Adrienne D AmbrosioCover Designer:Jodi NotowitzSenior International Acquisitions Editor:Cover Image:Robert Adrian Hillman/AlamyLaura DentPermissions Project Supervisor:Michael JoyceEditorial Project Manager:Jill KolongowskiMedia Producer:Melissa HonigDirector of Marketing:Patrice JonesAssociate Production Project Manager:Senior Marketing Manager.

3 Lori DeShazoAlison EusdenInternational Marketing Manager:Dean ErasmusFull-Service Project Management:Managing Editor:Nancy FentonMPS Limited, a Macmillan CompanyProduction Project Manager:Carla ThompsonCover Printer:Lehigh-PhoenixManufacturing Director:Evelyn BeatonColor/HagerstownPearson Education LimitedEdinburgh Gate, HarlowEssex CM20 2JE, Englandand Associated Companies throughout the worldVisit us on the World Wide Web Pearson Education Limited 2012 The right of William H. Greene to be identified as author of this work has been asserted by him inaccordance with the Copyright, Designs and Patents Act adaptation from the United States Edition , entitled Econometric Analysis ,ISBN 978-0-13-139538-1 by William H.

4 Greene published by Pearson Education, publishing asPrentice Hall rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording orotherwise, without either the prior written permission of the publisher or a licence permittingrestricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, SaffronHouse, 6 10 Kirby Street, London EC1N trademarks used herein are the property of their respective owners. The use of any trademark inthis text does not vest in the author or publisher any trademark ownership rights in such trademarks,nor does the use of such trademarks imply any affiliation with or endorsement of this book by and acknowledgements borrowed from other sources and reproduced, with permission, in thistextbook appear on an appropriate page within 13: 978-0-273-75356-8 ISBN 10.

5 0-273-75356-8 British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library1098765432115 14 13 12 11 Typeset in 10/12 Times by MPS Limited, a Macmillan and bound by Courier/Westford in The United States of AmericaThe publisher s policy is to use paper manufactured from sustainable GREE3568 07 GE FMFebruary 8, 201121:6 PEARSON SERIES IN ECONOMICSAbel/Bernanke/CroushoreMacroeco nomics*Bade/ParkinFoundations of Economics*Berck/HelfandThe Economics of the EnvironmentBierman/FernandezGame Theory with EconomicApplicationsBlanchardMacroeconom ics*Blau/Ferber/WinklerThe Economics of Women,Men and WorkBoardman/Greenberg/Vining/WeimerCost -Benefit AnalysisBoyerPrinciples of Transportation EconomicsBransonMacroeconomic Theory and PolicyBrock/AdamsThe Structure of American IndustryBrucePublic Finance and the AmericanEconomyCarlton/PerloffModern Industrial OrganizationCase/Fair/OsterPrinciples of Economics*Caves/Frankel/JonesWorld Trade and Payments.

6 An IntroductionChapmanEnvironmental Economics:Theory, Application, and PolicyCooter/UlenLaw & EconomicsDownsAn Economic Theory of DemocracyEhrenberg/SmithModern Labor EconomicsEkelund/Ressler/TollisonEconomi cs*FarnhamEconomics for ManagersFolland/Goodman/StanoThe Economics of Health and HealthCareFortSports EconomicsFroyenMacroeconomicsFusfeldThe Age of the EconomistGerberInternational Economics*GordonMacroeconomics*GreeneEco nometric AnalysisGregoryEssentials of EconomicsGregory/StuartRussian and Soviet EconomicPerformance and StructureHartwick/OlewilerThe Economics of NaturalResource UseHeilbroner/MilbergThe Making of the Economic SocietyHeyne/Boettke/PrychitkoThe Economic Way of ThinkingHoffman/AverettWomen and

7 The Economy:Family, Work, and PayHoltMarkets, Games and StrategicBehaviorHubbard/O BrienEconomics*Money, Banking, and the FinancialSystem*Hughes/CainAmerican Economic HistoryHusted/MelvinInternational EconomicsJehle/RenyAdvanced Microeconomic TheoryJohnson-LansA Health Economics PrimerKeat/YoungManagerial EconomicsKleinMathematical Methods for EconomicsKrugman/Obstfeld/MelitzInternat ional Economics:Theory & Policy*LaidlerThe Demand for MoneyLeeds/von AllmenThe Economics of SportsLeeds/von Allmen/SchimingEconomics*Lipsey/Ragan/St orerEconomics*LynnEconomic Development: Theory andPractice for a Divided WorldMillerEconomics Today*Understanding ModernEconomicsMiller/BenjaminThe Economics of Macro IssuesMiller/Benjamin/NorthTheEconomics of Public IssuesMills/HamiltonUrban EconomicsMishkinThe Economics of Money, Banking, andFinancial Markets*The Economics of Money, Banking, andFinancial Markets, Business SchoolEdition*Macroeconomics: Policy and Practice*MurrayEconometrics: A Modern IntroductionNafzigerThe Economics of DevelopingCountriesO Sullivan/Sheffrin/PerezEconomics: Principles, Applications andTools*ParkinEconomics*PerloffMicroeco nomics*Microeconomics.

8 Theory andApplications with Calculus*Perman/Common/McGilvray/MaNatur al Resources andEnvironmental EconomicsPhelpsHealth EconomicsPindyck/RubinfeldMicroeconomics *Riddell/Shackelford/Stamos/SchneiderEco nomics: A Tool for CriticallyUnderstanding SocietyRitter/Silber/UdellPrinciples of Money, Banking &Financial Markets*RobertsThe Choice: A Fable of Free Trade andProtectionRohlfIntroduction to Economic ReasoningRuffin/GregoryPrinciples of EconomicsSargentRational Expectations and InflationSawyer/SprinkleInternational EconomicsSchererIndustry Structure, Strategy, and PublicPolicySchillerThe Economics of Poverty andDiscriminationShermanMarket RegulationSilberbergPrinciples of MicroeconomicsStock/WatsonIntroduction to EconometricsIntroduction to Econometrics, BriefEditionStudenmundUsing Econometrics.

9 A Practical GuideTietenberg/LewisEnvironmental and Natural ResourceEconomicsEnvironmental Economics and PolicyTodaro/SmithEconomic DevelopmentWaldmanMicroeconomicsWaldman/ JensenIndustrial Organization: Theory andPracticeWeilEconomic GrowthWilliamsonMacroeconomics* denotestitlesLog onto to learn moreGreene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120:15 BRIEF CONTENTSQE xamples and Applications25 Preface33 Part IThe Linear Regression ModelChapter 1 Econometrics41 Chapter 2 The Linear Regression Model51 Chapter 3 Least Squares66 Chapter 4 The Least Squares Estimator91 Chapter 5 Hypothesis Tests and Model Selection148 Chapter 6 Functional Form and Structural Change189 Chapter 7 Nonlinear, Semiparametric.

10 And NonparametricRegression Models221 Chapter 8 Endogeneity and Instrumental variable Estimation259 Part IIGeneralized Regression Model and Equation SystemsChapter 9 The Generalized Regression Model and Heteroscedasticity297 Chapter 10 Systems of Equations330 Chapter 11 Models for Panel Data383 Part IIIE stimation MethodologyChapter 12 Estimation Frameworks in Econometrics472 Chapter 13 Minimum Distance Estimation and the GeneralizedMethod of Moments495 Chapter 14 Maximum Likelihood Estimation549 Chapter 15 Simulation-Based Estimation and Inference and RandomParameter Models643 Chapter 16 Bayesian Estimation and Inference695 Part IVCross Sections, Panel Data, and MicroeconometricsChapter 17 Discrete Choice721 Chapter 18 Discrete Choices and Event Counts800 Chapter 19 Limited Dependent Variables Truncation, Censoring,and Sample Selection8734 Greene-2140242A01 GREE3568 07 GE FMJune 1, 201115.