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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 259:
On Liu Estimators for the Logit Regression Model

Kristofer Månsson, B. M. Golam Kibria and Ghazi Shukur

Abstract: In innovation analysis the logit model used to be applied on available data when the dependent variables are dichotomous. Since most of the economic variables are correlated between each other practitioners often meet the problem of multicollinearity. This paper introduces a shrinkage estimator for the logit model which is a generalization of the estimator proposed by Liu (1993) for the linear regression. This new estimation method is suggested since the mean squared error (MSE) of the commonly used maximum likelihood (ML) method becomes inflated when the explanatory variables of the regression model are highly correlated. Using MSE, the optimal value of the shrinkage parameter is derived and some methods of estimating it are proposed. It is shown by means of Monte Carlo simulations that the estimated MSE and mean absolute error (MAE) are lower for the proposed Liu estimator than those of the ML in the presence of multicollinearity. Finally the benefit of the Liu estimator is shown in an empirical application where different economic factors are used to explain the probability that municipalities have net increase of inhabitants.

Keywords: Estimation; MAE; MSE; Multicollinearity; Logit; Liu; Innovation analysis; (follow links to similar papers)

JEL-Codes: C18; C35; C39; (follow links to similar papers)

14 pages, October 18, 2011

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