Tobit Regression Model Assumptions – Detailed Overview

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My (very basic) knowledge of the Tobit regression model isn't from a class, like I would prefer. Instead, I have picked up pieces of information here and there through several Internet searches. My best guess at the assumptions for truncated regression are that they are very similar to the ordinary least squares (OLS) assumptions. I have no idea if that is correct, though.

Hence my question: What are the assumptions I should check for when performing Tobit regression?

Note: The original form of this question referred to truncated regression, which was not the model I was using or asking about. I have corrected the question.

Best Answer

If we go for a simple answer, the excerpt from the Wooldridge book (page 533) is very appropriate:

... both heteroskedasticity and nonnormality result in the Tobit estimator $\hat{\beta}$ being inconsistent for $\beta$. This inconsistency occurs because the derived density of $y$ given $x$ hinges crucially on $y^*|x\sim\mathrm{Normal}(x\beta,\sigma^2)$. This nonrobustness of the Tobit estimator shows that data censoring can be very costly: in the absence of censoring ($y=y^*$) $\beta$ could be consistently estimated under $E(u|x)=0$ [or even $E(x'u)=0$].

The notations in this excerpt comes from Tobit model:

\begin{align} y^{*}&=x\beta+u, \quad u|x\sim N(0,\sigma^2)\\ y^{*}&=\max(y^*,0) \end{align} where $y$ and $x$ are observed.

To sum up the difference between least squares and Tobit regression is the inherent assumption of normality in the latter.

Also I always thought that the original article of Amemyia was quite nice in laying out the theoretical foundations of the Tobit regression.