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An adjusted maximum likelihood method for solving small area estimation problems

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  • Li, Huilin
  • Lahiri, P.
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    Abstract

    For the well-known Fay-Herriot small area model, standard variance component estimation methods frequently produce zero estimates of the strictly positive model variance. As a consequence, an empirical best linear unbiased predictor of a small area mean, commonly used in small area estimation, could reduce to a simple regression estimator, which typically has an overshrinking problem. We propose an adjusted maximum likelihood estimator of the model variance that maximizes an adjusted likelihood defined as a product of the model variance and a standard likelihood (e.g., a profile or residual likelihood) function. The adjustment factor was suggested earlier by Carl Morris in the context of approximating a hierarchical Bayes solution where the hyperparameters, including the model variance, are assumed to follow a prior distribution. Interestingly, the proposed adjustment does not affect the mean squared error property of the model variance estimator or the corresponding empirical best linear unbiased predictors of the small area means in a higher order asymptotic sense. However, as demonstrated in our simulation study, the proposed adjustment has a considerable advantage in small sample inference, especially in estimating the shrinkage parameters and in constructing the parametric bootstrap prediction intervals of the small area means, which require the use of a strictly positive consistent model variance estimate.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Multivariate Analysis.

    Volume (Year): 101 (2010)
    Issue (Month): 4 (April)
    Pages: 882-892

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    Handle: RePEc:eee:jmvana:v:101:y:2010:i:4:p:882-892

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    Related research

    Keywords: Adjusted density maximization estimator The Fay-Herriot model Parametric bootstrap Prediction intervals;

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    Cited by:
    1. Yeojin Chung & Sophia Rabe-Hesketh & Vincent Dorie & Andrew Gelman & Jingchen Liu, 2013. "A Nondegenerate Penalized Likelihood Estimator for Variance Parameters in Multilevel Models," Psychometrika, Springer, vol. 78(4), pages 685-709, October.
    2. Yoshimori, Masayo & Lahiri, Partha, 2014. "A new adjusted maximum likelihood method for the Fay–Herriot small area model," Journal of Multivariate Analysis, Elsevier, vol. 124(C), pages 281-294.

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