Limited Dependent Variables
The term limited dependent variable was first used by Tobin (1958) to denote the dependent variable in a regression equation that is constrained to be non-negative. In Tobin’s study the dependent variable is the household’s monetary expenditure on a durable good, which of course must be non-negative. Many other economic variables are non-negative. However, non-negativity alone does not invalidate standard linear regression analysis. It is the presence of many observations at zero which causes bias to the least squares estimator and requires special analysis. For example, Tobin’s data contain many households for which the expenditure on a durable good in a given year is zero.
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