Developing Consistent Marginal Effect Estimates in a Simultaneous Equation Model with Limited Dependent Variables

We demonstrate that Theil-type variance corrections are required to obtain consistent marginal effect estimates in Nelson-Olsen's two-stage limited dependent variable (2SLDV) model. As Theil's residuals-based corrections are infeasible with 2SLDV, we present variance correction procedures shown to be virtually equivalent to Theil’s 2SLS corrections for continuous models but that are implementable in 2SLDV models. Simulations demonstrate that the proposed variance correction procedures generate consistent marginal effect estimates. The effects of the correction procedures are illustrated in a study of technology adoption by Ethiopian farmers. Components of the variance correction procedures should prove useful in other applications involving limited dependent variables.