# Improving Information for Social Policy Decisions -- The Uses of Microsimulation Modeling: Volume II, Technical Papers(1991)

## Chapter: Limitations in Modeling

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Page 75
Suggested Citation:"Limitations in Modeling." National Research Council. 1991. Improving Information for Social Policy Decisions -- The Uses of Microsimulation Modeling: Volume II, Technical Papers. Washington, DC: The National Academies Press. doi: 10.17226/1853.
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STATISTICAL MATCHING AND MICROSIMULATION MODELS 75 where (for ease of notation) Y represents Yi, Z represents Z j, and X represents Xk(A) or X k(B). Often, as discussed above, the X(A) variables are selected so that variables in Y and Z will be well explained by X(A). Implicitly it is reasoned that if both ÏYX and ÏZX are close to 1, then the numerator of ÏYZ.X will be close to 0, or, what here amounts to the same thing, ÏYZ will be close to 1. To some extent this reasoning is valid, but it is surprising how variable the correlation between Yi and Zj, ÏYZ, can be even when ÏYX and ÏZX are fairly close to 1. This variability is disturbing since the estimation of these correlations is presumably a major reason the statistical match was performed. The variability of ÏYZ can be seen from the above formula. By setting ÏYZ.X equal to â1 and 1, To take an example from Rodgers (1984), assume that ÏYX equals .8 and ÏZX equals .8. Then ÏYZ ranges from 0.28 to 1.0. More generally, we see that and the correlation between Yi and Zj is completely determined by ÏYX and ÏZX only when at least one of them is essentially 1, or when ÏYZ.X equals 0. Thus, knowledge about the relationships between X(B) and Zj and between X(A) and Yi, from different files, typically is not sufficient to completely inform about the relationships between Yi and Zj. Armstrong (1990:1) points out: Distortion of type (iii) [distortion in the multivariate distribution of X, Y, and Z] is often unavoidable when statistical matching methods are employed. Statistical matching methods involve the assumption that Y and Z are independent conditional on X. When this assumption is violated, type (iii) distortion is inevitable. Moreover, when one of the correlations, ÏYX or ÏZX, is essentially equal to 1, what is the benefit of statistical matching? In that case one could use the linear combination of X(A) as a surrogate for the missing covariate. Paass (1985) thinks that the conditional independence assumption is almost inextricably linked with the distance measure used. This view makes sense because one can make the matches that are consistent with an assumed probabilistic structure more likely through the choice of the distance measure. For example, if one believes that Z and Y are negatively correlated conditioned on X, a distance measure can encourage the joining of records when this obtains. Paass (1985) mentions a variety of ways this can be accomplished, along with some simulation results (see also discussion below). Limitations in Mode ling Even after a statistically matched data set is created, statistical models cannot be

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Improving Information for Social Policy Decisions -- The Uses of Microsimulation Modeling: Volume II, Technical Papers Get This Book
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This volume, second in the series, provides essential background material for policy analysts, researchers, statisticians, and others interested in the application of microsimulation techniques to develop estimates of the costs and population impacts of proposed changes in government policies ranging from welfare to retirement income to health care to taxes.

The material spans data inputs to models, design and computer implementation of models, validation of model outputs, and model documentation.

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