Chapter 14

Limited Dependent Variable Models

In This Chapter

arrow Exploring censored and truncated variables

arrow Understanding and dealing with selection issues

Limited dependent variables are usually quantitative but have restricted values. You must pay particular attention to these types of situations because missing or constrained values for the dependent variable cause one or more traditional regression model assumptions to fail. Here are two examples of scenarios that result in limited dependent variables:

check.png You want to model the labor market using wages as the dependent variable, but only positive wages are observed, because when the wage is too low, individuals drop out of the labor force or the wage doesn’t meet the legal minimum wage.

check.png You want to model demand for basketball games using ticket sales as the dependent variable, but sales reach a maximum at the arena’s capacity (even if demand exceeds the sell-out capacity).

The restricted data available for outcomes makes using traditional regression analysis difficult. Fortunately, you can use econometric techniques to modify traditional ...

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