The problem

Econometrics is concerned with understanding and predicting the behaviors of economic agents. Some behavioral responses are structurally or observationally qualitative (categorical, discrete), rather than continuous. This is a survey of models and methods that have been developed for the analysis of qualitative responses.

Table 1.1 gives examples of economic qualitative responses. Empirical studies have concentrated on a constellation of problems in labor supply, such as occupational choice and employment status, and on travel behavior. The models that have been developed are strongly influenced by the specific features of these applications.

The examples in Table 1.1 are classified by economic agent: household, firm, or an interaction of agents. There are several other aspects of qualitative responses that may affect the choice of an appropriate method for analysis. First, the categorical response may be binomial (yes/no) or multinomial, and multinomial responses may be either naturally ordered or unordered. For example, the number of children is naturally ordered, whereas the brand of automobile purchased is not.

Second, the primary purpose of examining qualitative responses may be an intrinsic interest in explaining and forecasting the observed categorical behavior, or it may be the correction of biases induced by self-selection into a target population. For example, occupational choice is of direct interest because of its impact on labor supply, but it is also a potential source of bias in a study of labor hours supplied by a self-selected population of independent professional workers.