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Chapter 16

ECON 6002 Econometrics Memorial University of Newfoundland. Qualitative and Limited Dependent Variable Models. Chapter 16. Adapted from Vera Tabakova’s notes . Chapter 16: Qualitative and Limited Dependent Variable Models. 16.1 Models with Binary Dependent Variables

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Chapter 16

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  1. ECON 6002 Econometrics Memorial University of Newfoundland Qualitative and Limited Dependent Variable Models Chapter 16 Adapted from Vera Tabakova’s notes

  2. Chapter 16: Qualitative and Limited Dependent Variable Models • 16.1 Models with Binary Dependent Variables • 16.2 The Logit Model for Binary Choice • 16.3 Multinomial Logit • 16.4 Conditional Logit • 16.5 Ordered Choice Models • 16.6 Models for Count Data • 16.7 Limited Dependent Variables Principles of Econometrics, 3rd Edition

  3. 16.6 Models for Count Data When the dependent variable in a regression model is a count of the number of occurrences of an event, the outcome variable is y = 0, 1, 2, 3, … These numbers are actual counts, and thus different from the ordinal numbers of the previous section. Examples include: • The number of trips to a physician a person makes during a year. • The number of fishing trips taken by a person during the previous year. • The number of children in a household. • The number of automobile accidents at a particular intersection during a month. • The number of televisions in a household. • The number of alcoholic drinks a college student takes in a week. Principles of Econometrics, 3rd Edition

  4. 16.6 Models for Count Data If Y is a Poisson random variable, then its probability function is This choice defines the Poissonregressionmodel for count data. “rate” Also equal To the variance Principles of Econometrics, 3rd Edition

  5. 16.6.1 Maximum Likelihood Estimation If we observe 3 individuals: one faces one event, the other two two events each: Principles of Econometrics, 3rd Edition

  6. 16.6.2 Interpretation in the Poisson Regression Model So now you can calculate the predicted probability of a certain number y of events Principles of Econometrics, 3rd Edition

  7. 16.6.2 Interpretation in the Poisson Regression Model You may prefer to express this marginal effect as a %: Principles of Econometrics, 3rd Edition

  8. 16.6.2 Interpretation in the Poisson Regression Model If there is a dummy Involved, be careful, remember Which would be identical to the effect of a dummy In the log-linear model we saw under OLS Principles of Econometrics, 3rd Edition

  9. Extensions: overdispersion • Under a plain Poisson the mean of the count is assumed to be equal to • the average (equidispersion) • This will often not hold • Real life data are often overdispersed • For example: • a few women will have many affairs and many women will have few • a few travelers will make many trips to a park and many will make few • etc. Principles of Econometrics, 3rd Edition Slide16-9

  10. Extensions: overdispersion use "C:\bbbECONOMETRICS\Rober\GRAD\GROSMORNE.dta", clear Principles of Econometrics, 3rd Edition Slide16-10

  11. Extensions: negative binomial Under a plain Poisson the mean of the count is assumed to be equal to the average (equidispersion) The Poisson will inflate your t-ratios in this case, making you think that your model works better than it actually does  Or use a Negative Binomial model instead (nbreg) or even a Generalised Negative Binomial (gnbreg) , which will allow you to model the overdispersion parameter as a function of covariates of our choice You can also test for overdispersion, to test whether the problem is significant Principles of Econometrics, 3rd Edition Slide16-11

  12. Extensions: negative binomial sum visits Variable | Obs Mean Std. Dev. Min Max -------------+-------------------------------------------------------- visits | 966 1.416149 1.718147 1 26 Principles of Econometrics, 3rd Edition Slide16-12

  13. Extensions: negative binomial Principles of Econometrics, 3rd Edition Slide16-13

  14. Extensions: excess zeros Often the numbers of zeros in the sample cannot be accommodated properly by a Poisson or Negative Binomial model They would underpredict them too There is said to be an “excess zeros” problem You can then use hurdle models or zero inflated or zero augmented models to accommodate the extra zeros Principles of Econometrics, 3rd Edition Slide16-14

  15. Extensions: excess zeros Often the numbers of zeros in the sample cannot be accommodated properly by a Poisson or Negative Binomial model They would underpredict them too nbvargr Is a very useful command Principles of Econometrics, 3rd Edition Slide16-15

  16. Extensions: excess zeros • You can then use hurdle models or zero inflated or zero augmented • models to accommodate the extra zeros • They will also allow you to have a different process driving the value of the • strictly positive count and whether the value is zero or strictly positive • EXAMPLES: • Number of extramarital affairs versus gender • Number of children before marriage versus religiosity • In the continuous case, we have similar models (e.g. Cragg’s Model) and an example is that of size of Insurance Claims from fires versus the age of the building Principles of Econometrics, 3rd Edition Slide16-16

  17. Extensions: excess zeros You can then use hurdle models or zero inflated or zero augmented models to accommodate the extra zeros Hurdle ModelsA hurdle model is a modified count model in which there are two processes, one generating the zeros and one generating the positive values. The two models are not constrained to be the same. In the hurdle model a binomial probability model governs the binary outcome of whether a count variable has a zero or a positive value. If the value is positive, the "hurdle is crossed," and the conditional distribution of the positive values is governed by a zero-truncated count model. Example: smokers versus non-smokers, if you are a smoker you will smoke! Principles of Econometrics, 3rd Edition Slide16-17

  18. Extensions: excess zeros Hurdle ModelsIn Stata Joseph Hilbe’s downloadable ado HPLOGIT will work, although it does not allow for two different sets of variables, just two different sets of coefficients Example: smokers versus non-smokers, if you are a smoker you will smoke! Principles of Econometrics, 3rd Edition Slide16-18

  19. Extensions: excess zeros You can then use hurdle models or zero inflated or zero augmented models to accommodate the extra zeros Zero-inflated models (initially suggested by D. Lambert) attempt to account for excess zeros in a subtly different way. In this model there are two kinds of zeros, "true zeros" and excess zeros. Zero-inflated models estimate also two equations, one for the count model and one for the excess zero's. The key difference is that the count model allows zeros now. It is not a truncated count model, but allows for “corner solutions” Example: meat eaters (who sometime just did not eat meat that week) versus vegetarians who never ever do Principles of Econometrics, 3rd Edition Slide16-19

  20. Extensions: excess zeros webuse fish We want to model how many fish are being caught by fishermen at a state park. Visitors are asked how long they stayed, how many people were in the group, were there children in the group and how many fish were caught. Some visitors do not fish at all, but there is no data on whether a person fished or not. Some visitors who did fish did not catch any fish (and admitted it ) so there are excess zeros in the data because of the people that did not fish. Principles of Econometrics, 3rd Edition Slide16-20

  21. Extensions: excess zeros . histogram count, discrete freq Lots of zeros! Principles of Econometrics, 3rd Edition Slide16-21

  22. Extensions: excess zeros Vuong test Principles of Econometrics, 3rd Edition Slide16-22

  23. Extensions: excess zeros Vuong test Principles of Econometrics, 3rd Edition Slide16-23

  24. Extensions: truncation • Count data can be truncated too (usually at zero) • So ztp and ztnb can accommodate that • Example: you interview visitors at the recreational site, so they all made at least that one trip • In the continuous case we would have to use the truncreg command Principles of Econometrics, 3rd Edition Slide16-24

  25. Extensions: truncation This model works much better and showcases the bias in the previous estimates: Smaller now estimated Consumer Surplus Principles of Econometrics, 3rd Edition Slide16-25

  26. Extensions: truncation This model works much better and showcases the bias in the previous estimates: • Now accounting for overdispersion Principles of Econometrics, 3rd Edition Slide16-26

  27. Extensions: truncation and endogenous stratification • Example: you interview visitors at the recreational site, so they all made at least that one trip • You interview patients at the doctors’ office about how often they visit the doctor • You ask people in George St. how often the go to George St… • Then you are oversampling “frequent visitors” and biasing your estimates, perhaps substantially Principles of Econometrics, 3rd Edition Slide16-27

  28. Extensions: truncation and endogenous stratification • Then you are oversampling “frequent visitors” and biasing your estimates, perhaps substantially • It turns out to be supereasy to deal with a Truncated and Endogenously Stratified Poisson Model (as shown by Shaw, 1988): • Simply run a plain Poisson on “Count-1” and that will work (In STATA: poisson on the corrected count) • It is more complex if there is overdispersion though  Principles of Econometrics, 3rd Edition Slide16-28

  29. Extensions: truncation and endogenous stratification • Supereasy to deal with a Truncated and Endogenously Stratified Poisson Model Much smaller now estimated Consumer Surplus Principles of Econometrics, 3rd Edition Slide16-29

  30. Extensions: truncation and endogenous stratification • Endogenously Stratified Negative Binomial Model (as shown by Shaw, 1988; Englin and Shonkwiler, 1995): Even after accounting for overdispersion, CS estimate is relatively low Principles of Econometrics, 3rd Edition Slide16-30

  31. Extensions: truncation and endogenous stratification • How do we calculate the pseudo-R2 for this model??? Principles of Econometrics, 3rd Edition Slide16-31

  32. Extensions: truncation and endogenous stratification • GNBSTRAT will also allow you to model the overdispersion parameter in this case, just as gnbreg did for the plain case Principles of Econometrics, 3rd Edition Slide16-32

  33. NOTE: what is the exposure • Count models often need to deal with the fact that the counts may be measured over different observation periods, which might be of different length (in terms of time or some other relevant dimension) • For example, the number of accidents are recorded for 50 different intersections. However, the number of vehicles that pass through the intersections can vary greatly. Five accidents for 30,000 vehicles is very different from five accidents for 1,500 vehicles. • Count models account for these differences by including the log of the exposure variable in model with coefficient constrained to be one. • The use of exposure is often superior to analyzing rates as response variables as such, because it makes use of the correct probability distributions Principles of Econometrics, 3rd Edition Slide16-33

  34. 16.7 Limited Dependent Variables • 16.7.1 Censored Data Figure 16.3 Histogram of Wife’s Hours of Work in 1975 Principles of Econometrics, 3rd Edition

  35. 16.7.1 Censored Data Having censored data means that a substantial fraction of the observations on the dependent variable take a limit value. The regression function is no longer given by (16.30). The least squares estimators of the regression parameters obtained by running a regression of y on x are biased and inconsistent—least squares estimation fails. Principles of Econometrics, 3rd Edition

  36. 16.7.1 Censored Data Having censored data means that a substantial fraction of the observations on the dependent variable take a limit value. The regression function is no longer given by (16.30). The least squares estimators of the regression parameters obtained by running a regression of y on x are biased and inconsistent—least squares estimation fails. Principles of Econometrics, 3rd Edition

  37. Censoring versus Truncation With truncation, we only observe the value of the regressors when the dependent variable takes a certain value (usually a positive one instead of zero) With censoring we observe in principle the value of the regressors for everyone, but not the value of the dependent variable for those whose dependent variable takes a value beyond the limit

  38. 16.7.2 A Monte Carlo Experiment We give the parameters the specific values and Assume Principles of Econometrics, 3rd Edition

  39. 16.7.2 A Monte Carlo Experiment • Create N = 200 random values of xi that are spread evenly (or uniformly) over the interval [0, 20]. These we will keep fixed in further simulations. • Obtain N = 200 random values ei from a normal distribution with mean 0 and variance 16. • Create N = 200 values of the latent variable. • Obtain N = 200 values of the observed yi using Principles of Econometrics, 3rd Edition

  40. 16.7.2 A Monte Carlo Experiment Figure 16.4 Uncensored Sample Data and Regression Function Principles of Econometrics, 3rd Edition

  41. 16.7.2 A Monte Carlo Experiment Figure 16.5 Censored Sample Data, and Latent Regression Function and Least Squares Fitted Line Principles of Econometrics, 3rd Edition

  42. 16.7.2 A Monte Carlo Experiment Principles of Econometrics, 3rd Edition

  43. 16.7.3 Maximum Likelihood Estimation The maximum likelihood procedure is called Tobit in honor of James Tobin, winner of the 1981 Nobel Prize in Economics, who first studied this model. The probit probability that yi = 0 is: Principles of Econometrics, 3rd Edition

  44. 16.7.3 Maximum Likelihood Estimation The maximum likelihood estimator is consistent and asymptotically normal, with a known covariance matrix. Using the artificial data the fitted values are: Principles of Econometrics, 3rd Edition

  45. 16.7.3 Maximum Likelihood Estimation Principles of Econometrics, 3rd Edition

  46. 16.7.4 Tobit Model Interpretation Because the cdf values are positive, the sign of the coefficient does tell the direction of the marginal effect, just not its magnitude. If β2 > 0, as x increases the cdf function approaches 1, and the slope of the regression function approaches that of the latent variable model. Principles of Econometrics, 3rd Edition

  47. 16.7.4 Tobit Model Interpretation Figure 16.6 Censored Sample Data, and Regression Functions for Observed and Positive y values Principles of Econometrics, 3rd Edition

  48. 16.7.5 An Example Principles of Econometrics, 3rd Edition

  49. 16.7.5 An Example Principles of Econometrics, 3rd Edition

  50. 16.7.6 Sample Selection • Problem: our sample is not a random sample. The data we observe are “selected” by a systematic process for which we do not account. • Solution: a technique called Heckit, named after its developer, Nobel Prize winning econometrician James Heckman. Principles of Econometrics, 3rd Edition

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