Working Paper: NBER ID: w27182
Authors: Evan M. Munro; Serena Ng
Abstract: Beliefs are important determinants of an individual's choices and economic outcomes, so understanding how they differ across individuals is of considerable interest. Researchers often rely on surveys that report individual expectations as qualitative data. We propose using a Bayesian hierarchical latent class model to summarize and interpret observed heterogeneity in categorical expectations data. We show that the statistical model corresponds to an economic structural model of information acquisition, which guides interpretation and estimation of the model parameters. An algorithm based on stochastic optimization is proposed to estimate a model for repeated surveys when beliefs follow a dynamic structure and conjugate priors are not appropriate. Guidance on selecting the number of belief types is also provided. Two examples are considered. The first shows that there is information in the Michigan survey responses beyond the consumer sentiment index that is officially published. The second shows that belief types constructed from survey responses can be used in a subsequent analysis to estimate heterogeneous returns to education.
Keywords: Bayesian hierarchical model; latent class analysis; categorical survey data; expectations; information acquisition
JEL Codes: C25; C55; E71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| group membership (D71) | information source selection (L86) |
| information source selection (L86) | expectations about economic conditions (E66) |
| group membership (D71) | expectations about economic conditions (E66) |
| information source selection (L86) | beliefs about inflation and economic conditions (E31) |
| belief types (B00) | returns to education (I26) |
| access to pessimistic information sources (D83) | negative expectations about inflation (E31) |
| access to optimistic information sources (D83) | favorable outlook on inflation (E66) |