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Understanding Limited Dependent Variable Models for Economic Decision Analysis

Explore the factors influencing binary economic choices, estimating probabilities through Probit and Logit models, and analyzing multinomial and ordered choice data. Learn about Tobit regression for censored data and the Heckman procedure for sample selection bias.

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Understanding Limited Dependent Variable Models for Economic Decision Analysis

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  1. Qualitative and Limited Dependent Variable Models Chapter 18

  2. Binary dependent variables • Many economic choices are either or; • Farmers either use a computer or they don’t; • People either buy organic food or they don’t; • What are the factors that influence such decisions?

  3. The Linear Probability Model

  4. Problems with the LPM • Heteroscedasticity • Implausible predicted values • a consequence of the linear relationship.

  5. The Probit Model

  6. Maximum Likelihood Estimation What is the probability of observing three observations:

  7. Interpretation of the Probit Model Normal pdf

  8. Example

  9. Logit model PDF: CDF

  10. Other Models • Multinomial • Influence of individual’s attribute on choice of shop. • Influence of product attributes on choice of product (choice experiments, conjoint analysis) • Multinomial logit, conditional logit, multinomial probit. • Ordered choice • Strongly disagree, disagree neutral etc. • Ordered probit/logit. • Count data • Number of trips to the supermarket. • Poisson regression.

  11. Limited Dependent Variables • Tobit • Deals with the problem of censoring at zero. • Subsistence farmers sales on the market. • OLS is biassed • Sample selection • Average earnings of women. • Heckman procedure • equation 1: probit to explain participation. • equation 2: least squares wage equation including the inverse mills ratio.

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