Estimation based on the probit model, Microeconomics

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Let {(yi; xi); 1 ≤ i ≤ n} be an i.i.d sequence of random variables where yi and xi satisfy the linear relationship yi = β0 + β1xi +i with Cov(xi;i) = 0 and yi {0, 1} (i.e. yi is a binary dependent variable).

(a) Describe the main limitations of estimating β1 via OLS.

(b) Describe an alternative approach to estimation based on the Probit Model. Note that I expect you to be able to formulate the likelihood function.


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