The Role of Wealth Transformations: An Application to Estimating the Effect of Tax Incentives on Saving

Karen Pence

The B.E. Journal of Economic Analysis & Policy, 2006, vol. 5, issue 1, 26

Abstract: Researchers may want to estimate the percentage change of a variable, such as household wealth or corporate profits, that takes on economically significant nonpositive values. Using the logarithmic transformation, however, requires discarding observations with nonpositive values. This paper describes a possible solution to this problem-the inverse hyperbolic sine transformation-and shows how to implement this transformation optimally in the case of median regression. As an illustration of the usefulness of this transformation, I revisit a specification sometimes used to estimate the effect of tax incentives on household saving.

Keywords: inverse hyperbolic sine; transformations; 401(k) program (search for similar items in EconPapers)
Date: 2006
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DOI: 10.2202/1538-0645.1430

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