SOME METHODS FOR SMALL AREA ESTIMATION

Author(s): J.N.K. Rao

Source: Rivista Internazionale di Scienze Sociali , Ottobre-Dicembre 2008, Anno 116, No.
4 (Ottobre-Dicembre 2008), pp. 387-406
Published by: Vita e Pensiero – Pubblicazioni dell’Università Cattolica del Sacro Cuore

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 Rivista Internazionale di Scienze Sociali, 2008, n. 4, 387-406

SOME METHODS FOR SMALL AREA ESTIMATION

J.N.K. Rao*

ABSTRACT

Methods for small area estimation have received much attention in recent years due to g
demand for reliable small area statistics that are needed in formulating policies and program
tion of government funds, making business decisions and so on. Traditional area-specific di
mation methods are not suitable in the small area context because of small (or even zero) ar
fic sample sizes. As a result, indirect estimation methods that borrow information acros
areas through implicit or explicit linking models and auxiliary information, such as census
administrative records, are needed. This paper provides an introduction to small area estimat
emphasis on explicit model-based estimation. Methods covered include «off-the-shelf» re-w
methods, simulated census methods used by the World Bank and formal empirical Bayes an
archical Bayes methods, based on explicit models. Formal model-based methods permit th
tion of mean squared prediction error and the construction of confidence intervals.

Key words'. Small Area Estimation, Sample surveys.

JEL Classification : CI, C8, C83.

g
u
I - INTRODUCTION

.$
•8 Sample surveys have long been used to provide timely estimates of param
8
interest, such as totals, means and ratios, for subpopulations (or domains) of a f
1
u
population. Such estimates are «direct» in the sense of using only domain-s
-& sample data, provided the domain sample sizes are large enough to support
<L>
>
direct estimates. That is, the domains are «large» such as large geographi
'£
p (provinces in Canada) or age-sex groups at the national level. Typically, dir
mates are design based requiring minimal assumptions, and the associated in
'2
0
(standard errors of estimates, confidence intervals on the parameters, etc.) are
1
0
on the known sampling distribution induced by the sampling design, with the
tion item values held fixed. Standard text books on survey sampling theo
I methods (e.g. Kish, 1965; Cochran, 1977; Sarndal et al., 1992; Thompso
ì
CA
Lohr 1999) provide extensive accounts of design-based direct estimation a

1
<D

a
>
oc
* Carleton University, Ottawa, Canada. This paper is based on keynote talks presente
o
o
(N
workshop on Small Area Estimation and Local Territory, Catholic University of the Sac
© Piacenza, Italy, May 2005 and at the International Conference on Small Area Estima
2007), Università di Pisa, Pisa, Italy, September 2007. Thanks are due to Isabel Molina fo
ful reading of the paper and for constructive comments and suggestions.

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 388 J.N.K. RAO

ciated inferential methods alo

Supplementary population inf
other external sources is often u
ficient inferences on the parame
Due to cost and other operati
a large enough overall sample
(areas). Yet the demand for relia
recent years due to their grow
tion of government funds, regi
and so on. We use the term «s
cessarily geographical) for wh
produced because of small (or
amples of small area estimation
county level in the United St
monthly unemployment rates
lated estimates for local areas,
hunting success rates for small
and so on (see Rao, 2003, chap
from the Current Population S
are zero for many of the counti
rect estimates do not exist for those counties.
In view of the above mentioned difficulties associated with direct small area esti-
mates, it becomes necessary to employ «indirect» estimation for small areas by «bor-
rowing strength» from related small areas through linking models, using census and
administrative data and other auxiliary data sources associated with the small areas.
Borrowing strength can be regarded as increasing the «effective» small area sample
size.
Simple, but effective, methods based on implicit linking models have long been
used for small area estimation (see Rao, chapter 4). More recently, indirect estima-
tion methods based on explicit linking models have received a lot of attention be-
cause of the following advantages over traditional indirect estimation based on impli-
cit linking models: (1) Specific allowances for local variation can be made through
complex error structures in the model linking the small areas. (2) Model checking
methods can be used to validate linking models. (3) Methods can handle complex
cases such as cross-sectional and time series data, binary or count data, spatially-cor-
related data and multivariate data. (4) Area-specific meajsures of variability associated
with the indirect estimates may be obtained, unlike the overall measures of variability
commonly used with the traditional indirect estimates. A comprehensive account of
small area estimation based on explicit linking models is given by Rao (2003); see
also Jiang - Lahiri (2006) and Datta (2008) for recent overviews of model-based
small area estimation. Boonstra et al. (2008) provide a nice account of their efforts
towards model-based small area estimation at Statistics Netherlands and present two
applications to the Dutch Labor Force Survey.

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 SOME METHODS FOR SMALL AREA ESTIMATION 389

II - RE- WEIGHTING METHODS

We first discuss two 'off-the-shelf indirect estimation methods based on modif

ing the survey weights attached to the units j in the overall sample s to produce n
weights {wijj € s} for each small area i , utilizing known small area totals Xt
auxiliary vector x obtained from census and other administrative sources. The sur
weights may be design weights dj (inverse of probabilities of selection) or calibrat
weights Wj that ensure consistency with known population totals Z of an aux
vector z , i.e., Yhjes wjzj = Note that x may not be the same as z. In the first
od, modified weights wy are obtained that satisfy the constraints

= wJ'Jes (2J)
and

J2jesWvXj = Xi- (2-2)

Condition (2.1) ensures that the resulting estimators Y¡ - Yhjesw0j sma^ area
totals Yi of an item of interest y add up to the direct estimator Ý = Yhjes wjyj °f the
overall total Y , that is Yl Yi = Ý. Note that the estimator Y¿ for area i borrows
strength through the non-zero weights wy associated with the sample units j in other
areas / ^ i. Hence, Y¡ may be regarded as an indirect estimator. Unique solution to
(2.1) and (2.2) does not exist, so Schirm - Zaslavsky (1987) assumed a multiplicative
model on the weights wy given by

Wy = 1 (¡j exp ($Xj + 6j) , (2.3)

where the 7^ are user-specified constants such that 7^ = 1 if area i is allow
borrow strength from the area in which unit j belongs and 7^ = 0 otherwise,
Sj are unknown parameters associated with area i and sample element j . Not
the choice 7^ = 1 for all j in (2.3) allows area i to borrow strength from all
other areas. Substituting (2.3) in (2.1) and (2.2), unique values of /?, and 6j ar
tained iteratively and then substituted in (2.3) to get the desired weights {wy
for each area i. Note that the weights wy are non-negative because of the as
model (2.3) on the weights.
In the second method, a distance measure J2jes^ü minimized subject to (
separately for each i , where

Dy = ( gij - L) logife- - L)/{ 1 - L)} + (U- g9) log {(£/ - gij)/(U - 1)}, (

gij = Wij/dj , L(< 1) and U(> 1) are specified lower and upper bounds on gy.
solution {gijj G 5} does not exist, then the bounds L and U are adjusted to f
solution, but there is no guarantee that the resulting weights wy = gydj are all n
negative, unlike in the first method. Also, the condition (2.1) that ensures J]
may not be satisfied, but the second method avoids the model assumption
This method of indirect estimation has been used by the National Center for
and Economic Modeling (NATSEM) in Australia.

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 390 J.N.K. RAO

We now study the propertie

up, assuming that x and z ar
for both the calibration we
(j) = (wj - dj)2 /dj subject to
that v'xj - 1 for some v which
ables adding up to 1. The wei
the resulting estimator of
B = (^2kesdkXkXfk)~i(J2kesd
coefficient. Similarly, mi
Yljes wvxJ -Xu we get Wy = X¡
the area total Yt is the «regr
p. 46). In this special case, con
direct estimators Yt add up to t
variances because they are ba
biased for areas exhibiting st
large mean squared error (MS
If x is a vector of post-strata
area-specific post-strata popul
this case, regression-synthetic e
by Yi = YhgNig(Y.g/Ng), where
Yg and post-stratum size N.g.
Health Statistics, 1968) has been

Ill - SIMULATED CENSUSES

Methods based on simulated censuses of item values, using sam

(yjJ £ s) and census values (xj,j G U) have also been proposed for small
mation, where U denotes the population. However, small area effects ar
into consideration in creating the simulated censuses. We study the properti
methods, assuming xj is a scalar, for simplicity.
First consider the special case of simple random sampling and suppose that
associated with for j G s are ascertained through a linking process. In
suppose the simple linear regression model yj = ßo + ß'x y + SjJ G s is us
erate a simulated census, where the model errors Ej are independent and
distributed as normal variables with mean 0 and equal variance <j2e, de
#(0, oj); for simplicity we assume equal error variances. Let (ßo, ß') be th
least squares estimators of the regression coefficients (ßo, ß'), then ýj
ß'XjJ G U are the census predicted values. We now introduce random v
through a parametric bootstrap method by drawing e* from normal distribu
mean 0 and variance = Yljes ej / n > where n denotes the sample
ej = yj - yj are the residuals, and then generating simulated cens
y] =yj + £j ^ ^ ^ ' We repeat the bootstrap generation many times, say B
bootstrap simulated censuses {/¡b,j G U; b = 1, ...,5} .

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 SOME METHODS FOR SMALL AREA ESTIMATION 39 1

The estimator of a small area mean Yt from the simulated census b is taken as

= Ni{ Truffi = êo + frXi + Ě*b,b= 1 ...,B (3.1)

where U¡ denotes area i and E*b is the mean of e*h in area i. Combining the B est
mators Y*b in (3.1), the final simulated census estimator of the area mean f, is taken
as

?i+ = 5-1 Et i v» = ?» + + 5-1 EL Vf w

For large B , it follows from (3.2) that Y*+ œ ß o + ß'Xt which is equivalent to the
regression synthetic estimator Y¿s - ß0 + ß' Xi of the area mean f, . Hence the simu-
lated census estimator inherits the disadvantages of synthetic estimators.
A bootstrap estimator of MSE of Y*+ is taken as

VBÍV+) = B~l EL (*» - ^+)2 (3J)

For large 2?, we have

VB(?;+) « E.(Y; - E*(?*))2 = ¿řjNi (3.4)

where E* denotes the bootstrap expectation, Ni the population size of area i and Y*
the bootstrap mean. Hence, the bootstrap measure of variability will be very small if
Ni is large. We now demonstrate that the bootstrap MSE estimator (3.4) could lead
serious underestimation of true MSE if the model contains a random small area ef-
fect reflecting variation across areas. A nested error linear regression model is often
used for this purpose. Denoting the values of y and x for the unit j in small area i
by (yij,Xij), this small area model may be written as

ytj = ßo + ß'x,j + v, + ey ,j = 1 , (3.5)

where v, and e, y are independently distributed as N(0,al) an N(0,crl) respectively
and the represent the random small are effects. Under this model, it is easy to se
that the MSE of the regression synthetic estimator P# is approximately equal t
al + cri /Ni assuming the overall sample size n is large. This is also the approximat
MSE of the simulated census estimator (3.2) for large B. On the other hand, it is ea
sy to see that the expectation of the bootstrap MSE estimator (3.4) under the mode
(3.5) is approximately equal to (cr^ + cr^)/A^ which is very small for large N¡. It fo
lows that the bootstrap MSE estimator could lead to serious underestimation or
overly optimistic precision unless the between area variance is negligible.
For large scale socio-economic surveys, multi-stage sampling is often used. El-
bers et al. (2001, 2003) and Haslett - Jones (2005) developed a simulated censuses
method to develop poverty measures and associated estimators of MSE for small
areas. They have also used a nested error linear regression model but the random
area effects are not entertained. Instead, random effects associated with the clusters
in the sample design are used. In this application, ytj denotes the logarithm of earn
ings Ey of the household j in cluster i .Small area means of non-linear functions o

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 392 J.N.K. RAO

the ytj , say z,y ,are of interes

strap estimates of MSE are obta
in the expression for z,y. Thi
because it has been used by th
in Bangladesh, Nepal and som
Again, under a two-fold neste
within areas, it can be shown t
thetic regression estimator and
to serious underestimation unle
ligible, as demonstrated above
(2007) made a comparison of
on appropriate small area mode

IV - COMPOSITE ESTIMATORS

A natural way to balance the potential bias of a synthetic estimator against

stability of a direct estimator is to use a composite estimator obtained as
average of the two small area estimators, i.e., use 0,- (direct estimator) +
(synthetic estimator) for a suitably chosen weight 0/(0 < & < 1). Rao (200
4.3) studied different methods of determining <£,- and associated difficulties
al. (2003) argued that a direct estimator of the mean of a large area cov
small area i should be used as the synthetic component of the composite
because a synthetic estimator «based on using auxiliary information from oth
ables at hand is, in some respects, subjective» and «covariate-free small ar
tors are the only ones that are readily usable in the present stage of our offi
tics framework». However, the use of a large area direct estimator as the
component may also be regarded as subjective because it is based on the
model assumption that the area means are homogeneous across areas. Co
(2003) also proposed methods of determining the weight 0, under simp
sampling and certain assumptions. Simulation results were also reported o
formance of the proposed composite estimator based on data from the La
Census of Enterprises affiliated with the Social Security System in Catalo
Estimation of MSE of the composite estimator was not studied.
Harter et al. (2003) estimated the small area total Y¡ as

= ^Jkes, yk + 'YlkeV-Si ?k (4- 1

= Zw* + £ k&^~h) (4-2)

where % is the predicted value of yk based on a simple linear regression m
Si denotes the sample from area /. This estimator is model-based and appropria
simple random sampling. The form (4.2) of the proposed estimator may be
as a synthetic estimator plus a sample-based adjustment for lack of fit of

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 SOME METHODS FOR SMALL AREA ESTIMATION 393

med model. On the other hand, the form (4.1) may be intuitively appealing
user because it is the sum of the observed values for the sampled units plus
of the predicted values for the non-sampled units. It is interesting to note
large area sample mean is used as % in (4.1) then Yip reduces to a composi
mator: Ni( weighted average of the small area sample mean and the large a
ple mean with weights 0,- = rii/Ni and 1 - </>/), where n¡ is the area sampl
follows that more weight is given to the small area sample mean and less w
the large area sample mean as the sample size increases.
Harter et al. (2003) successfully applied the estimator Ýip to estimate employm
at the county/industry division level in the state of Illinois, USA, using month
vey data (available beginning of the following month) and quarterly admini
data obtained for all the employers (available five months following the re
quarter) to construct the predicted values. They showed that the use of the com
administrative data in constructing the proposed estimator leads to significant
efficiency compared to using only a direct estimator. In their application, the u
vel model (3.5) with random small area effects did not reveal significant va
in the random small area effects.

V - EXPLICIT SMALL AREA MODELS

As noted in Section I, small area methods based on explicit linking mode

be preferred over those based on implicit models. In this section, we give
count of explicit small area models that are widely used for small area es
Two types of basic small area models have been studied in the literature. In th
type, called the basic area level model, only area-specific auxiliary
Zi = (zi', ...,zip)' related to some suitable function 0¿ =g(Y¿) of the small
of interest Y¡(i = 1, ...,m), are used to develop a linear linking model of t
6 i = z'ß + V/. Here the represent random area effects and account for lo
tion beyond the variation reflected in the auxiliary variables z,. It is customar
sume that the random effects v, are independent and identically distribut
N(0,crl) variables, where o? represents the model variance. The assumed
model is then combined with a matching sampling model 0,- = g(f¡) = 0, +
Yi is a direct estimator of the total Y¿ (typically design-based) and the e¡
sampling errors assumed to be independent N(0,ißi) with known sampling
ipi conditional on 0¿. The combined basic area-level model may be w
0, = z'ß + Vi + ei which may be regarded as a special case of the familiar
mixed model with block diagonal covariance structure. For simplicity, we
sumed that all the areas are sampled, but the case of non-sampled areas
handled by assuming that the linking model holds for those areas as well. Our
est is in estimating the realized values of the totals Yt or the means Yj . Fay -
(1979) first used the basic area-level model with 0/ = log(f;) to estimate p
income Yt for small places in the United States. More recently (National
Council, 2000), this model with 0/ = log(y¿) has been used to estimate cou

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 394 J.N.K. RAO

erty counts of school-age chil

zo (2007) applied the basic area
lian provinces, and showed that
row strength across areas lead t
ing direct estimators.
The basic area level model h
sumption of known sampling
been proposed to produce stab
treated as known sampling va
ondly, the assumption = 0
is very small and is a non-line
cations, even if the direct est
realistic to use a sampling m
simply says that Yt is design
matched with the linking mode
directly to produce a linear m
estimation under mismatched
applied mismatched sampling
adults lacking basic literacy ski
Various extensions of the basic area level model have been studied in the litera-
ture, including correlated sampling errors, spatial correlation of model errors, and
models to handle time series and cross-sectional area-level data (see Rao, 2003,
Chapters 5 and 8). We give a brief description of a useful time series and cross-sec-
tional model (Rao - Yu, 1994) that may be of interest to social scientists. Using ob-
vious extension of the previous notation, let 6it = g{Yit) where Yit is the total for
small area i at time t(t = 1, .., T' i = 1, ...,m) . A simple linking model that reflects
dependence of model errors over time is given by 9it = z!itß + v, + uit where zit is the
vector of area-level auxiliary variables for area i at time t, v, is the random small area
effect as before, and the uit follows a common first order autoregressive process,
AR(1), for each i : uit = puiit-' + eit , 'p' < 1 with IID errors eit distributed as
N(0, o2). The matching sampling model is given by 9it = g(Yit) = 9it + eit, where eit
denote sampling errors assumed to be independently distributed as Af(0, with
known sampling variances ipit. All the random errors are assumed to be mutually in-
dependent. Our interest is in estimating the current area totals YiT using all the avail-
able data. Anderson - Hsiao (1981) proposed the above linking model but ignored
sampling errors (i.e. treated 9it as 9it) to estimate the regression parameters ß and the
variance parameters. You - Rao - Gambino (2003) applied the above time series and
cross sectional small area model to estimate unemployment rates for Census Metro-
politan Areas and Census Agglemerations using Canadian Labour Force Survey data
in conjunction with auxiliary census and area-level data. Quintano - Castellano -
Punzo (2008) applied the Rao-Yu model to estimate poverty and living conditions
measures at sub-national level. Datta et al. (1999) used a model similar to the Rao-
Yu model but replaced the AR(1) process by a random walk process with p = 1.
They also applied the model to estimate monthly unemployment rates for the US

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 SOME METHODS FOR SMALL AREA ESTIMATION 395

states using Current Population Survey (CPS) estimates as 0it and Unemploym
surance (UI) claims rate as a component of zit along with random month and ye
fects to account for seasonal variation in monthly unemployment rates.
The second type of basic small area models, called unit level models, is b
a sample of unit level response values y¡j (j = 1,. = 1 , ...,m) and asso
auxiliary variables Xy = (xuj, ..., with known area population means
Hi is the sample size in area i and m denotes the number of sampled areas.
error linear regression model is assumed for the population units j = 1, ..., N¡ an
same model is assumed to hold for the sample, i.e. sample design is not info
given the auxiliary variables. The sample model is given by ytj - x/ijß +
where the v¿ are IID N(0, o¿) variables and independent of e¡j which are ass
be IID N( 0, oj) variables. Here the parameter of interest is the realized valu
small area population mean fÍ9 but in some applications non-linear function
population values y# are also of interest. For example, a small-area poverty mea
used by the World Bank and others, is the mean, Fai, of the N¡ population
Faij - {(z ~ Eij) / z}a I (Eg < z), where E¿j is a suitable measure of welfare su
come or expenditure, z is the poverty line, I(Ey < z) = 1 if Eij
m < z) = 0 otherwise, and a is taken as 0, 1 or 2. Molina - Rao (2008)
the above nested error model with y¡j = log(^) and Fy can therefore be ex
as a non-linear function of y^. Objective here is to estimate the realized valu
small-area poverty measure Fai.
Various extensions of the basic unit level model have been proposed to
small area estimation involving binary responses or counts, two-stage sampling
in areas, multivariate responses, panel data and others (see Rao, 2003, Chapt
and 10). Recent applications of unit level models include the estimation of t
occupied by olive trees in small areas of a region located in Navarra, Spai
sample data and satellite image data as auxiliary information (Militino et al
and small area estimation of average household income using panel data (Fa
al., 2007).

VI - EMPIRICAL BAYES (EB) METHODS

6.1. Estimation of small area parameters

We now turn to "optimal" estimation of small area parameters under the assumed
small area models. In particular, Empirical Bayes or Empirical Best (EB) and Hier-
archical Bayes (HB) methods have been extensively used for this purpose (see Rao,
2003). In this section we focus on EB methods using the basic area level model of
Section V. HB methods are studied in section VII.
Published literature has largely focused on the optimal estimation of realized 0,-
under the basic area level model. Here the objective is to minimize the mean squared
prediction error (MSPE) defined as E(§i - 0¿)2 for any estimator 0;, where the expec-
tation is with respect to the assumed model. It is well-known that the best estimator,

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 396 J.N.K. RAO

0f, in the sense of minimiz

E{ßi'0i, ß , o¿) which depends
el parameters by suitable esti

ÔfB = ÎÂ + ( 1 - 7 ¡y iß (6. 1 )
where 7 ,• = + ipi). For example, we can use residual maximum likelihood
estimators (REML) of the model parameters obtained from the marginal distribution
of the direct estimators 0,-, namely independent N(z/iß, The form (6.1) of
the EB estimator shows that it is a weighted average of the direct estimator 0,- and
the «regression synthetic» estimator z!ß with weights 7,- and 1 - 7/ respectively. It
is clear that more weight is given to the direct estimator when the sampling variance
is small relative to the model variance and more weight to the synthetic estimator
when the sampling variance is large relative to the model variance. Note that the
EB estimator takes account of survey weights through the direct estimator and it i
design consistent as the sampling variance goes to zero, provided the direct estima-
tor is design consistent. For non-sampled areas, we use the synthetic estimator zlß
based on the values of z,- for those areas. The EB estimator (6.1) is also an empirica
best linear unbiased prediction (EBLUP) estimator of 0/ without normality assump-
tion when the model parameters are estimated by moment methods not requiring
normality. It may be noted that REML estimators of model parameters under nor-
mality remain asymptotically valid without normality assumption.
The EB estimator (6.1) is model unbiased for 0i9 but the resulting naïve estimator
fNEB - g-i(QEBj 0f the total Yi is model biased and no longer optimal. The proper
EB estimator of Y¡ is obtained by evaluating the conditional expectation
; see Rao (2003, p. 182) for a Monte Carlo approxima-
tion to the EB estimator.
A second-order Taylor linearization approximation to MSPE of the EB estimator
9fB under REML estimation of model parameters is given by

MSPE(èfB ) « gutá) + g2,.(^) + g3,(^) (6-2)

where the leading term gu(ol) = 7^1 shows a large reduction in MSPE compared
to ipi, the MSPE of the direct estimator, when the weight 7 ¡ attached to the direct
estimator in the EB estimator is small. The terms g2/(^) and g3/(o^) that account
for the error in estimating ß and respectively (see Rao, 2003, p. 128), are of or-
der 0(m~l) while the leading term is of order 0( 1), assuming that the number of
sampled small areas, m , is moderately large.
Monte Carlo approximations to the EB estimator of a small area parameter also
work in other cases. For the estimation of poverty measures using the unit level mod-
el mentioned in section V, Molina - Rao (2008) derived such approximations and de-
monstrated the superiority of EB estimators. We refer the reader to Rao (2003, Chap-
ter 9) for further applications of EB estimation.

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 SOME METHODS FOR SMALL AREA ESTIMATION 397

6.2. Estimation of MSPE

In addition to point estimators of small area parameters, we need good estim

of their MSPE which provide a measure of variability associated with the estim
Considerable attention has been given to the estimation of MSPE of EB es
Methods of MSPE estimation include Taylor linearization and re-sampling
such as the jackknife and the bootstrap. Taylor linearization is suited for the e
tor 0fB but gets messy for the EB estimator of g_1(0, ) and the EB estimators
erty measures under unit level models. On the other hand, re-sampling method
the jackknife and the bootstrap are more generally applicable, including the ab
timators and the EB estimators under generalized linear mixed models for bina
sponses and Poisson counts (Rao, 2003, Chapter 9).
A Taylor linearization estimator of MSPE of 0fB under REML estimation
el parameters is given by

mspe(dfB) = gu(¿í) + g2i(ôî) + 2g3,(<^) (6.3)

It is nearly unbiased for MSPE in the sense that its bias is of order lower than
m~l for large number of sampled areas. We refer the reader to Rao (2003, Chapter
7) for further details of the Taylor linearization method.
Turning to the jackknife estimation of MSPE, we provide the required steps for
the EB estimator 9fB. (1) Calculate the estimates of model parameters deleting each
area / in turn ( I = 1, ..., m). Denote those estimates by ß(l) and o^(/), and the result-
ing EB estimate of 0,- by QfB(l),l = 1 (2) Calculate a jackknife bias-adjusted
estimate of the leading term gn(c^) in the MSE approximation (6.2), using the jack-
knife bias reduction method of Quenouille (1956):

Mii = gu(ô2v) - m 1 ¿{g»(ô$(/)) -gi.(<^)} (6.4)

m

(3) Next calculate

1 m
<6-5)
Jfl m ' *
Jfl m ' 1=1

(4) The jackknife MSPE estimator is the sum of (6.4) and (6.5):

mspej(0fB) = Mu + M2i (6.6)

Jiang - Lahiri - Wan (2002) proposed the jackknife method and prove
is nearly unbiased, similar to the linearization estimator (6.3). As noted
jackknife method is more generally applicable and can handle a variety
small area models. However, the evaluation of the leading term M'¡ in th
MSPE estimator may involve complex numerical computations in such c
Rao (2009) proposed an alternative jackknife MSPE estimator that is com
simpler and its leading term in nonlinear cases is area specific in the se

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 398 J.N.K. RAO

pending on the area-specific d

Lahiri - Wan (JLW).
Parametric bootstrap versions
basic area-level mode have be
mann - Glickman (2004), se
MSPE estimator that requires on
strap sample, thus avoiding th
plicable to handle complex cas
like the JLW jackknife estim
using «double bootstrap» meth
assuming that the number of
bootstrap samples in each boots
here only the simpler bootstrap
area-level model.
In the bootstrap method, B bootstrap samples = l,...,m;6 = 1
are first generated as follows: (/) Generate vf and êf independently from N(0, cč)
and N( 0, ipi) respectively, (/z) Let = z!ß + vf + and = zfß + vf . Using the
bootstrap samples calculate the estimates and ¡3(b) of the model parameters
and /?, and the resulting EB estimates 9fB(b),i= 1, m. The simpler bootstrap
MSPE estimator is then given by

mspeB(0fB) = {ÔfB(b) - éf }2 (6.7)

D b= 1

Note that (6.7) only requires the calculation of EB estimates from each bootstrap
sample.
If B is sufficiently large, then (6.7) is essentially the MSPE of the bootstrap EB
estimator referring to the bootstrap model above. Therefore, appealing to (6.2) a sec-
ond order approximation to the bootstrap MSPE is given by (Gonzalez-Manteiga et
al., 2008)

mspeB(êfB) « guiai) + guio*) + g3/(<^) (6.8)

Comparing (6.8) and (6.3) it is clear that the bootstrap estimator (6.7) is not
nearly unbiased and leads to slight underestimation. This underestimation can be rec-
tified by resorting to a double bootstrap method as noted above.
Molina - Rao (2009) applied the simpler bootstrap method to estimate the MSPE
of EB estimators of poverty measures under unit level models and empirically de-
monstrated that the bootstrap estimator tracks the true MSPE well.

6.3. Confidence intervals

Normal approximation confidence intervals on the realized 0,-, based on the EB

estimator §fB and a nearly unbiased MSPE estimator under the basic area-level

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 SOME METHODS FOR SMALL AREA ESTIMATION 399

model assuming normality of the random effects v,- and the sampling errors e¡,
not second-order accurate as the number of small areas, m , increases. That
error in coverage probability is not of order lower than 0(l/m). As a result,
research has focused on constructing second-order accurate confidence int
using the bootstrap method. Chatteijee - Lahiri - Li (2008) used calibration
on the parametric bootstrap to obtain values (¿1,^2) such that the in
(§fB - t' yfgxi, 6fB + Î2y/gïi) on the realized 0¿ has coverage error of orde
than 0(1 /w), where gu = gii(o^) is the naïve MSPE estimator. Simulation r
suggested good performance in terms of coverage probability. Their bootstr
bration method also works for other small area models based on the linear mixed
model. It would be practically appealing to find a similar second-order accurate
confidence interval using a nearly unbiased MSPE estimator in place of gu because
one would be using the former MSPE estimator to measure variability in the EB es-
timator. It would be useful to obtain similar second-order accurate bootstrap confi-
dence intervals in the case of mismatched small area models and other complex
models including models for handling binary responses and count data.
Hall - Maiti (2006a, b) obtained different bootstrap intervals but they do not make
use of the point estimator QfB , unlike Chatteijee et al. (2008).
Smith (2001) in his unpublished Ph.D. dissertation developed alternative EB in-
tervals under the basic area level model, based on asymptotic expansions of the cov-
erage probability, that are also second-order accurate. The topic of second-order ac-
curate EB intervals is technically complex, and extensions to more complex models
are technically challenging.

VII - HIERARCHICAL BAYES METHODS

In the hierarchical Bayes (HB) approach, model parameters are treated

variables and assigned a prior distribution. The posterior distribution of
parameter of interest is then obtained from the prior and the likelihood fun
erated from the data and the assumed model. Typically, closed-form expr
the desired posterior distributions do not exist, but powerful Monte Carl
such as Monte Carlo Markov Chain (MCMC) methods are now available fo
ing simulated samples from the posterior. Powerful software, such as W
also available to implement MCMC under complex small area models.
An HB estimate of the parameter of interest is given by its posterior mea
the data. Similarly, posterior variance is used to measure the variability in th
timate. «Credible» intervals on the parameter are obtained from the posterio
tion. An advantage of the HB approach is that it is straightforward and the
are «exact» unlike the EB approach, and it can handle complex small ar
using MCMC methods. But it requires the specification of a prior on the mod
meters and caution needs to be exercised when using MCMC metho
2003, Chapter 10).
We illustrate the HB approach for the basic area-level model. Given a prior

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 400 J.N.K. RAO

model parameters ß and o' ,

J, of simulated samples {
of 0i, ..., 6 m given the data. U

timate 9fB of 6 i by the m

variance J~l Y^j=' ~ °f th
approximations to the HB es

variance are readily obtain

J~x J2j=' respectiv
models can also be readily h
na - Nandram - Rao (2009) h
poverty measures derived from
A difficulty with the HB met
bution /(/?, on the model para
default priors are often use
priori independent with a «fla
prior on a2v that reflects lack
Datta - Rao - Smith (2005) con
the posterior variance is nearl
cation for the posterior varian
pends on the known sampling
cific sampling variance ^ . In t
duces to the flat prior on o^. N
area /. Therefore, its dependen
MCMC methods are also ex
tion, which plays an importa
see Rao (2003, chapter 10). H
dation are not necessarily po
monstrated by Sinharay - Ster

VIII - CONCLUDING REMARKS

The main objective of this paper is to provide an introduction to modern m

for small area estimation. A wide range of methods is covered with emph
plicit modeling, in particular empirical Bayes and hierarchical Bayes methods.
section, additional remarks are provided on some theoretical and practica
lated to small area estimation.
It is beneficial to address precision issues that have an impact on small area estima-
tion at the design stage, at least for planned domains (areas). We refer the reader to Rao
(2003, section 2.6) for some recommendations that include minimization of clustering
in the design, use of many strata and integration of different surveys including the use
of multiple (but possibly incomplete) frames. Such measures might help in reducing the

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 SOME METHODS FOR SMALL AREA ESTIMATION 40 1

need for indirect estimates and improving the efficiency of indirect estimates. Re
Longford (2006) addressed sample allocation issues at the design stage for planned
mains. He proposed to minimize a weighted sum of sampling variances of direct e
mators for small areas and a direct estimator of the aggregate over the area
weights are named «inferential priorities». This method may be potentially usefu
in practice the specification of weights could be problematic. Chowdhry - Ra
proposed an alternative solution to sample allocation that avoids the specifica
weights by minimizing the total sample size subject to desired tolerances on the
sampling variances and on the aggregate sampling variance.
Various theoretical issues related to model specification have been studied
cent years. In particular, the following problems among others have been add
(1) Robust estimation in the presence of outliers (Ghosh - Maiti, 2008; Sinha
2009; Tzavidis - Chambers, 2005). (2) Measurement errors in the covariates
ciated with unit level models (Ghosh - Sinha - Kim, 2006; Torabi - Datta -
2009). (3) Covariate information in the basic area level model subject to sampl
rors (Ybarra - Lohr, 2008). (3) Sensitivity of inferences to errors in specify
sampling variances in the area level model (Bell, 2008; Rivest - Vandal
Wang - Fuller, 2003). (4) Replacing parametric regression assumption in the l
models by weaker non-parametric specifications, in particular using penalized
regression models (Opsomer et al., 2008; Ugarte et al., 2008). (5) Pfefferma
Sverchkov (2007) studied informative probability sampling of areas and wit
sampled areas, thus relaxing the assumption that the model specification ho
the sample data. Singh - Folsom - Vaish (2008) developed a HB approach to
informative sampling within areas, assuming all the areas are sampled.
We have focused on model-based estimation of small area totals or means,
practice we may be interested in ranking the areas or identifying areas that fall
or above some pre-specified level. In the latter case, estimators designed for
or totals are not suitable. Shen - Louis (1998) proposed «triple» goal estimati
can produce good ranks, a good histogram and good area-specific estimators,
ing a simple linking model. Extensions of triple goal estimation to cover mor
plex small area models would be practically useful. Ganesh - Lahiri (2007) s
multiple comparisons (in particular, pair-wise comparisons) of small area m
using the hierarchical Bayes (HB) framework.
It is desirable and often necessary to ensure that the small area estimates
to a reliable direct estimate at a large area level. This property is called bench
ing (see Rao, 2003, section 7.2 for some benchmarking methods proposed in
erature). Wang - Fuller - Qu (2008) proposed to enlarge the linking model to
automatic benchmarking, thus facilitating the estimation of mean squared predic
error (MSPE) of the benchmarked small area estimators.
Subject-matter specialists or end users should have influence on the cho
models, particularly on the choice of auxiliary variables. However, statistical
ods for model selection and validation play a vital role in small area estimat
remarked earlier, linking models often used in small area estimation are based on
ear mixed or generalized linear mixed models containing random effects ass

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 402 J.N.K. RAO

with the small areas. Tradition

models are not suitable in the p
Meza - Lahiri (2005) showed th
variable selection in the regress
linear regression model when th
proposed a modification of the
The adjusted Cp statistic perfo
the Cp statistic in the regressio
ditional Akaike information cr
may not be appropriate for line
AIC criterion to handle mixed
called «fence method» for mix
developed an adaptive fence m
small area context.

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 SOME METHODS FOR SMALL AREA ESTIMATION 403

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