Gamma unobserved heterogeneity and duration bias

Røed et al. ( 1999 ) demonstrate that the standard result of known negative duration bias does not necessarily hold in a two-state mixed proportional hazard (MPH) model. We show that the duration bias is still ambiguous in a MPH model with a multivariate gamma distribution. A discrete time two-state version of our MPH model is developed to analyze the duration of higher education. The estimation results show that we cannot reject the hypothesis that the two unobserved heterogeneity variables are uncorrelated. Accepting this hypothesis implies that the standard result holds in our analysis.