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Arbitrary Inflation in Fractional Models

Author

Listed:
  • 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)

  • Mark N. Harris

    (School of Accounting, Economics and Finance, Curtin University, Australia)

  • Karl Taylor

    (Department of Economics, University of Sheffield; and IZA Bonn)

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).

Suggested Citation

  • Sarah Brown & Daniel Gray & William Greene & Mark N. Harris & Karl Taylor, 2023. "Arbitrary Inflation in Fractional Models," Working Papers 2023006, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2023006
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, February 28 2023
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    More about this item

    Keywords

    Focal-points; Fractional models; Inflated outcomes; Subjective probabilities; Marginal propensity to consume;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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