This paper proposes a methodology that accounts for the selection effect due to non-random entry in duration models using latent-class models. A mixed proportional hazard model with continuous finite mixture unobserved heterogeneity (MPH-CFM) is introduced to correct for the potential bias induced by the selection effect. Conditions for identification, consistency, and asymptotic normality of the MPH-CFM are provided. The estimator is used to investigate the duration of new entrant Canadian manufacturing firms. For the current application, the MPH-CFM is compared with alternative duration models and found to be superior. Empirically, the results indicate that there are two classes of firms. Class I starts with high hazard and decreases non-monotonically while Class II has a negligible hazard. These empirical results can be used to understand alternative models of firm dynamics.

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Keywords Duration models, EM algorithm, Finite mixtures, Firm exit, Selection
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Journal Applied Stochastic Models in Business and Industry
Huynh, K. (Kim), & Voia, M.-C. (2017). Mixed proportional hazard models with continuous finite mixture unobserved heterogeneity: An application to Canadian firm survival. Applied Stochastic Models in Business and Industry. doi:10.1002/asmb.2225