<p>Broadly speaking endogeneity means that something some variable is determined within model as opposed to outside it. More narrowly in econometrics it means correlated with the error term (Wooldridge, (2009). Introductory Econometrics: 4ed. p. 88). These meanings are related since one will often lead to the another.</p>
<p>In this paper they actually use it in both meanings.</p>
<ol>
<li>From economic literature we know that industry structures (e.g. whether industry is monopoly, duopoly, oligopoly, monopolistic etc.) depends on institutional setting and laws as well  (e.g. see discussions of this in Belleflmame &amp; Peitz Industrial Organization Part IV). Moreover, it is often further argued that in turn laws that country implements also depend on &quot;economic conditions of a firm’s country&quot; (Dong, 2019).  So what they mean is that industry structure will not be just given by some <em>exogenous parameters</em> such as let's say availability of local natural resources (this could be an exogenous force that could determine if industry is a monopoly e.g. if there is let's say only 1 viable diamond mine then this would be exogenous factor leading determining market structure to be a monopoly). Rather, here the market structure is shaped by the leniency programs that affect cost of collusion and in turn the leniency programs likely depend on economic conditions (e.g. a country with less problem with cartels might have less anti-trust laws).</li>
<li>Dong (2019) throughout the chapter in previous paragraphs Dong repeatedly states that they are dealing with endogeneity because it could be a valid critique of identification strategy (i.e. their empirical model). Consequently, they also mean it in more narrow way that it would mean that in their regression of margins on those leniency laws the leniency laws would be correlated with error term. In fact, this is why Dong says that they dealt with it by using leniency index from 1990s - using past ('lagged') values instead of contemporaneous one's is a common econometric technique to deal with endogeneity in an empirical model.</li>
</ol>

CC BY-SA 4.0
2021-05-09T11:34:03.680Z
Hi @1muflon1,thank you for your dedicated explanation. Shortly speaking, for first part, economic condition affects laws, affecting industry structure. However, the example at the end of this part can be improved, I deem. To me the example "a country with less problem with cartels might have less anti-trust laws" seems not really compatible with the meaning for "leniency programs likely depend on economic conditions". Or I may not get your point clearly. I may think of "economic condition" is like GDP, or some macro variables in specific.
Phil Nguyen
CC BY-SA 4.0
2021-05-09T11:35:54.177Z
@PhucNguyen no competition or amount of collusion *are* economic conditions. Also GDP is an indicator (although it too indicates  economic conditions).
1muflon1
CC BY-SA 4.0
2021-05-09T11:41:23.470Z
I understand your explanation clearly now. I am interested in your last sentence "using past ('lagged') values instead of contemporaneous one's is a common econometric technique to deal with endogeneity in an empirical model.". Is there any suggested paper or document that I can read about that, it may be a good source of learning for me for future papers when dealing with endogeneity.
Phil Nguyen
CC BY-SA 4.0
2021-05-09T11:53:07.160Z
@PhucNguyen using lagged variables is most basic recommendation you will find in most econometric textbooks (although it does not work always). Papers usually do not go into great detail into this because it was already known for a very long time. For ways how to deal with endogeneity you can have a look at verbeek a guide to modern econometrics chapter 5. Regarding justification for lagged variables as instruments in macro context you can have look at Romer Advanced Macroeconomics pp 376. Most important feature of instrument is that it is uncorrelated with an error term. Anything that
1muflon1
CC BY-SA 4.0
2021-05-09T11:54:47.623Z
is presently known and occurred in past should not be correlated with errors if people are rational and forward looking  (although, it is best to still test instruments because even though we know people are not completely myopic behavioral econ shows that sometimes they are not fully rational and in some context that might mean that errors today will depend on past realization of variable you are using).
1muflon1
CC BY-SA 4.0
2021-05-09T22:27:36.510Z
Thank you for your explanation. I am curious about one more thing: I agree that using "lagged" value instead of contemporaneous one is a common econometric to deal with endogeneity. In this case, the author used the year 1990. I was asking myself, why not 1980 but 1990? And I thought that 1990 is good choice because the US is the earliest country to put this law into practice in 1993. If we use the benchmark in 1980, this Export Market Leniency Laws variable will be affected by other laws of these countries which caused confounding events, did I fall into any fallacy?
Phil Nguyen
CC BY-SA 4.0
2021-05-09T22:56:53.320Z
@PhucNguyen I don’t know enough about the paper or the topic to answer that, my first guess would be it’s because of some data issue.
1muflon1
CC BY-SA 4.0
2021-05-12T22:21:58.997Z
@1mflon1: Can I ask in this case, whether wkj is a time-invariant variable (calculated based on year 1990)  and Lkt is a time-variant variable? Thank you.
Phil Nguyen
CC BY-SA 4.0
2021-06-16T20:58:11.753Z
@1muflon1 , may I ask where in the paper of [Dong, 2019](https://academic.oup.com/rfs/article/32/7/2587/5079300) mentioned this statement **"Moreover, it is often further argued that in turn laws that country implements also depend on "economic conditions of a firm’s country""**?
Phil Nguyen
CC BY-SA 4.0
2021-06-16T21:16:49.547Z
@BeautifulMindset if it does not have time subscript it should be time invariant. Regarding that statement it’s not a direct quote but I am paraphrasing (direct quotes are in “”) in the Dong 2019 they state that “passage of leniency programs might not be fully exogenous to the political and economic conditions” they state that on pp 15 and literally provide you with further references there. If that would not be case then that sentence in the paper would make no sense. But, worrying about endogeneity of industry structure is common in IO, you can see the textbook I quoted above.
1muflon1
CC BY-SA 4.0
2021-05-08T09:31:00.507Z
2021-05-08T09:31:00.507Z
1muflon1
<p><a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/1756-2171.12299" rel="nofollow noreferrer">Dong,2019,page 899</a> documented that:</p>
<blockquote>
<p>We estimate Export Market Leniency Laws as the weighted average of the passage of leniency
programs in all other countries, excluding the country in which the firm is headquartered:</p>
<p><span class="math-container">$$ \text{(Export Market Leniency Laws)}_{jkt} = \sum_k w_{kj}L_{kt}, $$</span></p>
<p>where <span class="math-container">$k$</span> denotes any country other than country <span class="math-container">$k$</span>, <span class="math-container">$j$</span> denotes a three-digit SIC industry, and <span class="math-container">$t$</span> denotes the year. <span class="math-container">$w_{kj}$</span> is the share of the three-digit SIC industry <span class="math-container">$j$</span>’s exports from country <span class="math-container">$k$</span> to any other country <span class="math-container">$k$</span> out of all of the exports from industry <span class="math-container">$j$</span> in country <span class="math-container">$k$</span> in 1990. <span class="math-container">$L_{kt}$</span> is an indicator
variable that takes a value of one if country <span class="math-container">$k$</span> passed a leniency program by year <span class="math-container">$t$</span>, and zero otherwise. To avoid any endogeneity of the industry structure, we base the weights on the data in year 1990. The variable ranges from zero when none of the foreign countries that receive any exports from the firm’s industry have passed a law to one when all of the foreign countries with exports from the firm’s industry have passed leniency programs.</p>
</blockquote>
<p>I do not understand what does &quot;endogeneity of the industry structure&quot; means in this context, and why we need to base the weights on the data in year 1990 to avoid this issue?</p>

CC BY-SA 4.0
2021-05-08T08:45:50.883Z
1. writing out equations is not done not to annoy people but in order to make the equations searchable. Please have a look at this link and familiarize yourself with mathjax https://math.meta.stackexchange.com/questions/5020/mathjax-basic-tutorial-and-quick-reference. Since you are student of economics it will do you good for a future since most respected academicians use latex for their research and latex equations work virtually identically to mathjax 2. You should **not** post pictures of a text.
1muflon1
CC BY-SA 4.0
2021-05-08T08:53:10.227Z
This time I edited it for you please next time try to do it yourself at least for the text
1muflon1
<industrial-organisation><endogeneity>
What does "endogeneity of the industry structure" means?
Phil Nguyen
# What does "endogeneity of the industry structure" means?

(Asked by: username_0 on 2021-05-08)

[Dong,2019,page 899](https://onlinelibrary.wiley.com/doi/epdf/10.1111/1756-2171.12299) documented that:

> We estimate Export Market Leniency Laws as the weighted average of the passage of leniency
> programs in all other countries, excluding the country in which the firm is headquartered:
>
> $$ \text{(Export Market Leniency Laws)}\_{jkt} = \sum\_k w\_{kj}L\_{kt}, $$
>
> where $k$ denotes any country other than country $k$, $j$ denotes a three-digit SIC industry, and $t$ denotes the year. $w\_{kj}$ is the share of the three-digit SIC industry $j$’s exports from country $k$ to any other country $k$ out of all of the exports from industry $j$ in country $k$ in 1990. $L\_{kt}$ is an indicator
> variable that takes a value of one if country $k$ passed a leniency program by year $t$, and zero otherwise. To avoid any endogeneity of the industry structure, we base the weights on the data in year 1990. The variable ranges from zero when none of the foreign countries that receive any exports from the firm’s industry have passed a law to one when all of the foreign countries with exports from the firm’s industry have passed leniency programs.

I do not understand what does "endogeneity of the industry structure" means in this context, and why we need to base the weights on the data in year 1990 to avoid this issue?

**Tags:** industrial-organisation, endogeneity

> **Comments:**
> **username_1**: 1. writing out equations is not done not to annoy people but in order to make the equations searchable. Please have a look at this link and familiarize yourself with mathjax https://math.meta.stackexchange.com/questions/5020/mathjax-basic-tutorial-and-quick-reference. Since you are student of economics it will do you good for a future since most respected academicians use latex for their research and latex equations work virtually identically to mathjax 2. You should **not** post pictures of a text.  
> **username_1**: This time I edited it for you please next time try to do it yourself at least for the text  

---

## 1 answers

### Answer by username_1 on 2021-05-08. Score: 1 | Accepted answer

Broadly speaking endogeneity means that something some variable is determined within model as opposed to outside it. More narrowly in econometrics it means correlated with the error term (Wooldridge, (2009). Introductory Econometrics: 4ed. p. 88). These meanings are related since one will often lead to the another.

In this paper they actually use it in both meanings.

1. From economic literature we know that industry structures (e.g. whether industry is monopoly, duopoly, oligopoly, monopolistic etc.) depends on institutional setting and laws as well (e.g. see discussions of this in Belleflmame & Peitz Industrial Organization Part IV). Moreover, it is often further argued that in turn laws that country implements also depend on "economic conditions of a firm’s country" (Dong, 2019). So what they mean is that industry structure will not be just given by some *exogenous parameters* such as let's say availability of local natural resources (this could be an exogenous force that could determine if industry is a monopoly e.g. if there is let's say only 1 viable diamond mine then this would be exogenous factor leading determining market structure to be a monopoly). Rather, here the market structure is shaped by the leniency programs that affect cost of collusion and in turn the leniency programs likely depend on economic conditions (e.g. a country with less problem with cartels might have less anti-trust laws).
2. Dong (2019) throughout the chapter in previous paragraphs Dong repeatedly states that they are dealing with endogeneity because it could be a valid critique of identification strategy (i.e. their empirical model). Consequently, they also mean it in more narrow way that it would mean that in their regression of margins on those leniency laws the leniency laws would be correlated with error term. In fact, this is why Dong says that they dealt with it by using leniency index from 1990s - using past ('lagged') values instead of contemporaneous one's is a common econometric technique to deal with endogeneity in an empirical model.

> **Comments:**
> **username_0**: Hi @username_1,thank you for your dedicated explanation. Shortly speaking, for first part, economic condition affects laws, affecting industry structure. However, the example at the end of this part can be improved, I deem. To me the example "a country with less problem with cartels might have less anti-trust laws" seems not really compatible with the meaning for "leniency programs likely depend on economic conditions". Or I may not get your point clearly. I may think of "economic condition" is like GDP, or some macro variables in specific.  
> **username_1**: @PhucNguyen no competition or amount of collusion *are* economic conditions. Also GDP is an indicator (although it too indicates  economic conditions).  
> **username_0**: I understand your explanation clearly now. I am interested in your last sentence "using past ('lagged') values instead of contemporaneous one's is a common econometric technique to deal with endogeneity in an empirical model.". Is there any suggested paper or document that I can read about that, it may be a good source of learning for me for future papers when dealing with endogeneity.  
> **username_1**: @PhucNguyen using lagged variables is most basic recommendation you will find in most econometric textbooks (although it does not work always). Papers usually do not go into great detail into this because it was already known for a very long time. For ways how to deal with endogeneity you can have a look at verbeek a guide to modern econometrics chapter 5. Regarding justification for lagged variables as instruments in macro context you can have look at Romer Advanced Macroeconomics pp 376. Most important feature of instrument is that it is uncorrelated with an error term. Anything that  
> **username_1**: is presently known and occurred in past should not be correlated with errors if people are rational and forward looking  (although, it is best to still test instruments because even though we know people are not completely myopic behavioral econ shows that sometimes they are not fully rational and in some context that might mean that errors today will depend on past realization of variable you are using).  
> **username_0**: Thank you for your explanation. I am curious about one more thing: I agree that using "lagged" value instead of contemporaneous one is a common econometric to deal with endogeneity. In this case, the author used the year 1990. I was asking myself, why not 1980 but 1990? And I thought that 1990 is good choice because the US is the earliest country to put this law into practice in 1993. If we use the benchmark in 1980, this Export Market Leniency Laws variable will be affected by other laws of these countries which caused confounding events, did I fall into any fallacy?  
> **username_1**: @PhucNguyen I don’t know enough about the paper or the topic to answer that, my first guess would be it’s because of some data issue.  
> **username_0**: @1mflon1: Can I ask in this case, whether wkj is a time-invariant variable (calculated based on year 1990)  and Lkt is a time-variant variable? Thank you.  
> **username_0**: @username_1 , may I ask where in the paper of [Dong, 2019](https://academic.oup.com/rfs/article/32/7/2587/5079300) mentioned this statement **"Moreover, it is often further argued that in turn laws that country implements also depend on "economic conditions of a firm’s country""**?  
> **username_1**: @BeautifulMindset if it does not have time subscript it should be time invariant. Regarding that statement it’s not a direct quote but I am paraphrasing (direct quotes are in “”) in the Dong 2019 they state that “passage of leniency programs might not be fully exogenous to the political and economic conditions” they state that on pp 15 and literally provide you with further references there. If that would not be case then that sentence in the paper would make no sense. But, worrying about endogeneity of industry structure is common in IO, you can see the textbook I quoted above.  

---

