Abstract:Economic models often depend on quantities that are unobservable, either for privacy reasons or because they are difficult to measure. Examples of such variables include human capital (or ability), personal income, unobserved heterogeneity (such as consumer "types"), etc. This situation has historically been handled either by simply using observable imperfect proxies for each the unobservables, or by assuming that such unobservables satisfy convenient conditional mean or independence assumptions that enable th… Show more
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