Fitting and Interpreting Cragg's Tobit Alternative using Stata

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  • William J. Burke
    Department of Agricultural, Food, and Resource Economics Michigan State University East Lansing, MI

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<jats:p> In this article, I introduce the user-written command craggit, which simultaneously fits both tiers of Cragg's (1971, Econometrica 39: 829–844) “two-tier” (sometimes called “two-stage” or “double-hurdle”) alternative to tobit for corner-solution models. A key limitation to the tobit model is that the probability of a positive value and the actual value, given that it is positive, are determined by the same underlying process (i.e., the same parameters). Cragg proposed a more flexible alternative that allows these outcomes to be determined by separate processes through the incorporation of a probit model in the first tier and a truncated normal model in the second. Also, tobit is nested in craggit, making the latter a popular choice among “two-tier” models. In the article, I also present postestimation syntax to facilitate the understanding and interpretation of results. </jats:p>

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