What does "endogeneity of the industry structure" means?

Question

Dong,2019,page 899 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?

Answer 1

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.