Paper #1447

Title:

Incompatibility of estimation and policy objectives. An example from small-area estimation

Author:

Nicholas Longford

Date:

October 2014

Abstract:

We show on an application to small-area statistics that efficient estimation is not always conducive to good policy decisions, because the established inferential procedures have no capacity to incorporate the priorities and preferences of the policy makers and the related consequences of incorrect decisions. A method that addresses these deficiencies is described. We argue that elicitation of the perspectives of the client (sponsor) and their quantification are essential elements of the analysis, because different estimators (decisions) are appropriate for different perspectives. An example of planning an intervention in a country’s districts with high rate of illiteracy is described. In the problem, the established small-area estimators perform poorly because the minimum mean squared error is an inappropriate criterion.

Keywords:

Composition; empirical Bayes; expected loss; borrowing strength; exploiting similarity; shrinkage; small-area estimation.

JEL codes:

MSC classification: 62-C12, 62-D99, 62-07.

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