2120 final report.pdf - Agra CEAS Consulting

APPENDIX 2: THIRD COUNTRIESA3.6. Sensitivity analysisThe approach we take to sensitivity analysis is that introduced by Zhao et al (2000b). The methodemployed is via the use of subjective probability distributions as in common in Bayesian inference.The basic method requires that we assign probability distributions for all parameters. In our modelthis means that we undertake this for all the elasticity estimates.The choice of probability distribution is subjective and somewhat arbitrary. However, either atruncated normal or uniform distribution have been found to yield meaningful results previously(Zhao et al., 2000b). By employing a truncated normal distribution we are assuming that a parameterhas a higher probability of taking values near the mode and less likely to values further away. Atruncated normal distribution also allows to specify the range over which we think the parameter canreasonably vary.The choice of mean and variance are also subjective, but can be partly determined by reference tothe literature and existing empirical applications of the methodology. We can also truncate theelasticities to be positive or negative depending on prior knowledge and views. Our choices aredetailed in Table A3.2 below.418