Arbitrary Inflation in Fractional Models

Sarah Brown (), Daniel Gray, William Greene (), Mark Harris and Karl Taylor ()
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Sarah Brown: Department of Economics, University of Sheffield, UK; and IZA Bonn
Daniel Gray: Department of Economics, University of Sheffield, UK
William Greene: Stern Business School, New York University, USA
Karl Taylor: Department of Economics, University of Sheffield; and IZA Bonn

No 2023006, Working Papers from The University of Sheffield, Department of Economics

Abstract: The analysis of subjective probabilities, that are fractional or share variables by definition, is becoming increasingly widespread in both economics and the social sciences in general. To avoid nonsensical predictions, empirical predictions for such variables must respect the fact that they are necessarily bounded on the 0 − 1 (or, 0 − 100, for percentage-type responses) interval. In addition, where the response variable of interest corresponds to a self-report on a fixed scale, individuals are often drawn to particular focal-point responses, resulting in distinct spikes in the empirical distribution. In this paper, we suggest a simple model that accounts for all of the nuances of such data, including its fractional and bounded nature as well as arbitrary inflation at such focal-points (which may appear at any point in the interval and are highly likely at the endpoints). We estimate our model using data drawn from the Italian Survey of Income and Wealth relating to an individual’s subjective marginal propensity to consume (MPC).

Keywords: Focal-points; Fractional models; Inflated outcomes; Subjective probabilities; Marginal propensity to consume (search for similar items in EconPapers)
JEL-codes: C34 D84 E21 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2023-02
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