Models for Measured Income

Abstract

Measurement error can impact estimator precision, obscure estimated relationships between variables, and distort the estimated intertemporal behavior of important economic characteristics. A commonly known model for measurement error assumes that measured income is the product of true income and a multiplicative measurement error, which is distributed independently of the level of true income. Based on this model, we derive a collection of flexible parametric forms for the distribution of measured income. We feel that this work could serve as an important reference for measurement error modeling.