Testing the rationality of expectations of qualitative outcomes. (30th April 2018)

• Record Type: Journal Article
• Authors: Madeira, Carlos
• Is Part Of: Journal of applied econometrics. Volume 33:Number 6(2018)
• Page Start: 837
• Page End: 852
• Publication Date: 2018-04-30
• Subjects: Econometrics -- Periodicals; 330.015195
• DOI: 10.1002/jae.2625
• Languages: English
• ISSNs: 0883-7252

Abstract

Summary: This article provides an adequate statistic for testing the rationality of point predictions of categorical outcomes under a subjective median or mode assumption. The test improves upon previous approaches by accounting for all the required moment inequalities and their respective covariance matrix in a single statistic. Monte Carlo simulations show that the test has an improved Type I error, especially in cases with multiple modes. Applying these tests to a dataset with parents' and students' predictions of school scores, I find that respondents are biased towards expecting higher grades and that students' expectations are correlated with the time of study.