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Calculating marginal effects in dichotomous - continuous models

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  • Atanu Saha
  • Oral Capps
  • Patrick Byrne

Abstract

In many economic settings, individual decisions can be viewed as a sequential process where a dichotomous choice is followed by a continuous choice. These processes are frequently encountered in consumption demand studies, where the decision of whether or not to consume a particular commodity is followed by the choice of how much to consume. The Heckman two-step approach has been extensively used in estimating these models. Expressions are derived for calculating marginal effects of regressors in dichotomous-continuous models. It is proposed that the marginal effect expressions are incomplete in almost all consumption demand studies that use the Heckman approach. In dichotomous-continuous models, a change in an explanatory variable that is common to both stages of the decision process has two effects: (1) it affects the likelihood of whether the commodity will be consumed; and (2) if the commodity is consumed, it affects the expenditure on that commodity. The first effect has so far been omitted from applied demand studies. The correct marginal effect expressions are derived for single-commodity and multiple-commodity demand models. An application to consumption survey data on 12 food commodities shows that erroneous marginal effect expressions can introduce substantial bias in demand elasticity estimates.

Suggested Citation

  • Atanu Saha & Oral Capps & Patrick Byrne, 1997. "Calculating marginal effects in dichotomous - continuous models," Applied Economics Letters, Taylor & Francis Journals, vol. 4(3), pages 181-185.
  • Handle: RePEc:taf:apeclt:v:4:y:1997:i:3:p:181-185 DOI: 10.1080/135048597355474
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    References listed on IDEAS

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    1. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-181, March.
    2. Baillie, Richard T & Bollerslev, Tim, 1994. " Cointegration, Fractional Cointegration, and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 737-745, June.
    3. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. " On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-735, June.
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    Citations

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    Cited by:

    1. Byrne, Patrick J. & Capps, Oral, Jr. & Saha, Atanu, 1998. "Analysis Of Quick-Serve, Mid-Scale, And Up-Scale Food Away From Home Expenditures," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IFAMA), vol. 1(01).
    2. Haripriya Gundimeda & Atheendar Gunnar Köhlin, 2006. "Fuel Demand Elasticities for Energy and Environmental Policies: Indian Sample Survey Evidence," Working Papers 2006-09, Madras School of Economics,Chennai,India.
    3. Panagiotis Lazaridis, 2004. "Demand elasticities derived from consistent estimation of Heckman-type models," Applied Economics Letters, Taylor & Francis Journals, vol. 11(8), pages 523-527.
    4. Zhuo Chen & Steven Yen, 2005. "On bias correction in the multivariate sample-selection model," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2459-2468.
    5. Haripriya Gundimeda & Gunnar Köhlin, 2006. "Fuel Demand Elasticities for Energy and Environmental Policies Indian Sample Survey Evidence," Energy Working Papers 22501, East Asian Bureau of Economic Research.
    6. Akay, Alpaslan & Tsakas, Elias, 2006. "Second Order Approximation for the Average Marginal Effect of Heckman's Two Step Procedure," Working Papers in Economics 239, University of Gothenburg, Department of Economics.
    7. Vega, Jose De Jesus Garcia & Gracia, Marcial Canales, 2000. "The Role Of Economic And Demograhpic Variables In Mexican Food Consumption," Journal of Food Distribution Research, Food Distribution Research Society, vol. 31(01), March.
    8. Wen S. Chern & Kimiko Ishibashi & Kiyoshi Taniguchi & Yuki Tokoyama, 2002. "Analysis of Food Consumption Behavior by Japanese Households," Working Papers 02-06, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    9. Pedro A. Alviola & Oral Capps, 2010. "Household demand analysis of organic and conventional fluid milk in the United States based on the 2004 Nielsen Homescan panel," Agribusiness, John Wiley & Sons, Ltd., vol. 26(3), pages 369-388.

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