While a variety of specification tests are routinely employed to test for misspecification in linear regression model, such tests and their applications to the truncated and censored regression models are uncommon. This paper develops a regression error specification test (RESET) for the truncated regression model as an extension of the popular RESET for the linear regression model (Ramsey (1969)). The two proposed extensions TRESET1 and TRESET2 developed in the paper are applied to labor force participation data from Mroz (1987). The paper studies the empirical size and power properties of the proposed tests via Monte Carlo experiments. Our simulation results suggest that both TRESET tests have reasonably good size and power properties for the truncated regression model in medium to large samples. However, TRESET2 consistently outperforms TRESET1 both in terms of empirical size and power in our experiments.
Power properties of the modified CUSUM tests