Econometrica: Sep, 1973, Volume 41, Issue 5

Combining Microsimulation and Regression: A "Prepared" Regression of Poverty Incidence on Unemployment and Growth

https://doi.org/0012-9682(197309)41:5<955:CMARA">2.0.CO;2-2
p. 955-963

Barbara R. Bergmann

In most empirical work, the investigator's understanding of the economic process under study is only minimally reflected in the econometric methodology. This paper suggests that in many cases, the construction of a small-scale simulation can "prepare" the data for regression in a manner which takes cognizance of the theory of the process. Regression is then used to scale the output of the simulation up to observed magnitudes of the variable to be predicted. The simulation has the function of exploring for the nature of the nonlinearities and interactions and thus replaces the usual search for a form which maximizes R^2. The simulation may also be helpful where colinear data are a problem. An example is presented in which the effects of wages, unemployment rates, and labor turnover on poverty are studied through a "prepared" regression.