A generalized mixed model for skewed distributions applied to small area estimation

Abstract

Models with random (or mixed) effects are commonly used for panel data, in microarrays, small area estimation and many other applications. When the variable of interest is continuous, normality is commonly assumed, either in the original scale or after some transformation. However, the normal distribution is not always well suited for modeling data on certain variables, such as those found in Econometrics, which often show skewness even at the log scale. Finding the correct transformation to achieve normality is not straightforward since the true distribution is not known in practice. As an alternative, we propose to consider a much more flexible distribution called generalized beta of the second kind (GB2). The GB2 distribution contains four parameters with two of them controlling the shape of each tail, which makes it very flexible to accommodate different forms of skewness. Based on a multivariate extension of the GB2 distribution, we propose a new model with random effects designed for skewed response variables that extends the usual log-normal-nested error model. Under this new model, we find empirical best predictors of linear and nonlinear characteristics, including poverty indicators, in small areas. Simulation studies illustrate the good properties, in terms of bias and efficiency, of the estimators based on the proposed multivariate GB2 model. Results from an application to poverty mapping in Spanish provinces also indicate efficiency gains with respect to the conventional log-normal-nested error model used for poverty mapping.