The specification of dynamic discrete-time two-state panel data models

Abstract

This paper compares two approaches to analyzing longitudinal discrete-time binary outcomes. Dynamic binary response models focus on state occupancy and typically specify low-order Markovian state dependence. Multi-spell duration models focus on transitions between states and typically allow for state-specific duration dependence. We show that the former implicitly impose strong and testable restrictions on the transition probabilities. In a case study of poverty transitions, we show that these restrictions are severely rejected against the more flexible multi-spell duration models. Show more