Individual Heterogeneity and State Dependence: From George Biddell Airy to James Joseph Heckman

Abstract

In this paper I examine the evolution of an idea: that differences between statistical relationships and the observations on which they are based, or disturbances, may have meaning and structure and that such meaning and structure must be taken into account despite the fact that they arise from unobservables. When working with micro data, principal unobservables arise from individual heterogeneity which may occur in part from path dependence. My disturbing conclusion is that we cannot separate individual unobserved behavior due to past experience from other types of unobserved heterogeneity. This means, in particular, that we cannot obtain economically meaningful estimates of distributed lags or other models of path dependence without making ad hoc assumptions having no economic content.

Keywords

• heterogeneity
• path dependence