Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Multivariate Versus Multinomial Probit: When are Binary Decisions Made Separately also Jointly Optimal?

Dale J. Poirier, Deven Kapadia

Last modified: 2012-06-22

Abstract


We provide an analysis of the question in the title in terms of a bivariate probit framework representing two (possibly correlated) separate decisions, and a  multinomial probit framework representing the four possible outcomes viewed as  one joint decision. We offer a Bayesian treatment that builds on Weeks and Orme (1998) and Di Tommaso and Weeks (2000) who showed that the bivariate probit corresponds to a singular four-dimensional multinomial probit under testable restrictions. We also discuss extensions to trivariate and quadrivariate probit.

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