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Testing the rationality of expectations of qualitative outcomes

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  • Carlos Madeira

Abstract

This article provides an adequate statistic for testing the rationality of point predictions of categorical outcomes under a subjective median or mode assumption. The test improves upon previous approaches by accounting for all the required moment inequalities and their respective covariance matrix in a single statistic. Monte Carlo simulations show that the test has an improved Type I error, especially in cases with multiple modes. Applying these tests to a dataset with parents' and students' predictions of school scores, I find that respondents are biased towards expecting higher grades and that students' expectations are correlated with the time of study.

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  • Carlos Madeira, 2018. "Testing the rationality of expectations of qualitative outcomes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(6), pages 837-852, September.
    • Handle: RePEc:wly:japmet:v:33:y:2018:i:6:p:837-852
    DOI: 10.1002/jae.2625
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    Cited by:

    1. Pamela Giustinelli, 2022. "Expectations in Education: Framework, Elicitation, and Evidence," Working Papers 2022-026, Human Capital and Economic Opportunity Working Group.
    2. Carlos Madeira, 2022. "Partial identification of nonlinear peer effects models with missing data," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-18, December.
    3. Carlos Madeira, 2020. "Measuring the perceived value of an MBA degree," Working Papers Central Bank of Chile 876, Central Bank of Chile.
    4. Madeira, Carlos, 2020. "Learning your own ability," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).

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