Two empirical applications

In the previous chapter it was shown how the general-equilibrium model of Chapter 3 can be transformed into a probabilistic-choice model that (dependent on the assumptions made with respect to the error terms) may lead to a multinomial probit or logit model with estimable parameters. In this model individuals choose simultaneously their employment status (c.q. self-employment or wage-employment) and the sector in which they want to work. However, the size of the available data sets do not permit estimation of this comprehensive model. Therefore, we will simplify it to a univariate dichotomous (probit) model in which only the choice between self-employment and wage-employment is investigated. Thus, we arrive at a model consisting out of three equations: the equation describing the choice between self-employment and wage-employment and the earnings equations for the two different occupations. It is noted that such a model has become known in the literature as an endogenous switching model.