Measurement Error Models

Measurement error is important in econometric analysis. Its presence causes inconsistent parameter estimates. Under the classical measurement error assumption, instrumental variable methods can be used to eliminate the bias caused by measurement errors using a second measurement. This technique can be extended to polynomial regression models. For nonlinear models, deconvolution methods have been developed to cope with classical measurement errors. When the classical measurement error assumption is violated, auxiliary data-sets are usually needed to provide additional source of identification. When the true variable takes only discrete values, the mismeasurement problem takes the form of misclassification and requires special techniques.