In the quest for economic significance: assessing variable importance through mean value decomposition

Abstract

Economic significance is frequently assessed through statistical hypothesis testing, which however, does not always correspond to the implicit economical questions being addressed. In this article we propose using mean value decomposition to assess economic significance. Unlike most previously suggested methods the proposed one is intuitive and simple to conduct. The technique is demonstrated and contrasted with hypothesis tests by an empirical example involving the income of Mexican children, which shows that the two inference approaches provide different and supplementary pieces of information.

Keywords:

• conditioning
• economic significance
• regression analysis
• mean value decomposition
• goodness-of-fit

JEL Classification:

• C54
• C51
• I32