A Hierarchical Bayes Unit-Level Small Area Estimation Model for Normal Mixture Populations

TL;DR

This paper introduces a hierarchical Bayesian small area estimation model using a normal mixture for unit-level errors, improving estimates for subpopulations with limited sample data by accommodating non-normal error distributions.

Contribution

The paper proposes a novel hierarchical Bayesian model with a normal mixture error distribution for small area estimation, enhancing flexibility over traditional normal error assumptions.

Findings

The proposed method outperforms existing Bayesian approaches in prediction accuracy.

Simulation results show improved coverage probabilities and credible interval lengths.

Application to real data demonstrates practical effectiveness in agricultural statistics.

Abstract

National statistical agencies are regularly required to produce estimates about various subpopulations, formed by demographic and/or geographic classifications, based on a limited number of samples. Traditional direct estimates computed using only sampled data from individual subpopulations are usually unreliable due to small sample sizes. Subpopulations with small samples are termed small areas or small domains. To improve on the less reliable direct estimates, model-based estimates, which borrow information from suitable auxiliary variables, have been extensively proposed in the literature. However, standard model-based estimates rely on the normality assumptions of the error terms. In this research we propose a hierarchical Bayesian (HB) method for the unit-level nested error regression model based on a normal mixture for the unit-level error distribution. To implement our proposal we use a uniform prior for the regression parameters, random effects variance parameter, and the mixing proportion, and we use a partially proper non-informative prior distribution for the two unit-level error variance components in the mixture. We apply our method to two examples to predict summary characteristics of farm products at the small area level. One of the examples is prediction of twelve county-level crop areas cultivated for corn in some Iowa counties. The other example involves total cash associated in farm operations in twenty-seven farming regions in Australia. We compare predictions of small area characteristics based on the proposed method with those obtained by applying the Datta and Ghosh (1991) and the Chakraborty et al. (2018) HB methods. Our simulation study comparing these three Bayesian methods showed the superiority of our proposed method, measured by prediction mean squared error, coverage probabilities and lengths of credible intervals for the small area means.