Estimating demand systems with corner solutions: the performance of Tobit-based approaches

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2024-02-12
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Ban, Kyunghoon
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Taylor & Francis Group
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Lence, Sergio
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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Abstract
Since Tobin’s (1958) innovative censored dependent variable framework, practitioners have been facing a clear trade-off between flexibility and theoretical plausibility in modeling consumers’ preferences in the presence of zero consumptions; the Kuhn-Tucker (or virtual price) approach is rigorously based on the economic choice theory but cannot be applied to complex and flexible demand systems, whereas the Tobit-based approach can be applied to any class of demand systems but is deficient in the theoretical foundations on the underlying preferences behind the observed choices. Hence, we assess the performance of three Tobit-based approaches (simple, correlated, and Amemiya-Tobin) and explore the extent of possible biases in elasticity estimates to provide reasonable criteria for model selection. Our analysis concludes that theoretical restrictions implied by the choice theory are essential to the Tobit model and improve its ability to capture the true underlying elasticities and mitigate overrejections. However, the performance of the Tobit models gradually deteriorates as the number of zero consumptions increases; the average rejection rate against the true elasticity values increases substantially as we have more zero consumptions. We illustrate the performance differences among the three Tobit models by applying them to the estimation of demand for fruits and vegetables.
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This is a manuscript of an article published as Kyunghoon Ban & Sergio H. Lence (2024) Estimating demand systems with corner solutions: the performance of Tobit-based approaches, Applied Economics, DOI: 10.1080/00036846.2024.2313989. © 2022 Informa UK Limited, trading as Taylor & Francis Group. Posted with permission.

JEL classification: C15, C34, Q11
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