Tobit Model

Definition: A tobit model is an econometric model in which the dependent variable is censored; in the original model of Tobin (1958), for example, the dependent variable was expenditures on durables, and the censoring occurs because values below zero are not observed.

The model is:

y_i^*=bx_i+u_i where u_i~N(0,s²)

But y_i^* (e.g., durable goods desired by the consumer described by variables x_i) is not observed.

y_i=y_i^* if y_i^*>y₀, and y_i=y₀ otherwise

y_i is observed.

y₀ is known. s² is often treated as known. x_i's are observed for all i.

(Econterms)

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