The Tobit model with a non-zero threshold.pdfVIP

Econometrics Journal (2007), volume 10, pp. 488–502. doi: 10.1111/j.1368-423X.2007.00218.x The Tobit model with a non-zero threshold RICHARD T. CARSON AND YIXIAO SUN Department of Economics, University of California, San Diego E-mail: rcarson@ucsd.edu,yisun@ucsd.edu First version received: August 2006; final version accepted: April 2007 Summary The standard Tobit maximum likelihood estimator under zero censoring threshold produces inconsistent parameter estimates, when the constant censoring threshold γ is non- zero and unknown. Unfortunately, the recording of a zero rather than the actual censoring threshold value is typical of economic data. Non-trivial minimum purchase prices for most goods, fixed cost for doing business or trading, social customs such as those involving charitable donations, and informal administrative recording practices represent common examples of non- zero constant censoring threshold where the constant threshold is not readily available to the econometrician. Monte Carlo results show that this bias can be extremely large in practice. A new estimator is proposed to estimate the unknown censoring threshold. It is shown that the estimator is superconsistent and follows an exponential distribution in large samples. Due to the superconsistency, the asymptotic distribution of the maximum likelihood estimator of other parameters is not affected by the estimation uncertainty of the censoring threshold. Key words: Exponential distribution, Maximum likelihood, Order statistic, Threshold determination. 1. INTRODUCTION In this paper, we consider the standard Tobit model (Tobin 1958):