A study of area clustering using factor analysis in small area estimation (An analysis of per capita expenditures of subdistricts level in regency and municipality of Bogor)

Abstract

Empirical Best Linear Unbiased Prediction (EBLUP) is one of indirect estimating methods which used to estimate parameters of small areas. EBLUP methods works in using auxiliary variables of area while adding the area random effects. In estimating non-sampled area, the standard EBLUP can no longer be used due to no information of area random effects. To obtain more proper estimation methods for non sampled area, the standard EBLUP model has to be modified by adding cluster information. The aim of this research was to study clustering methods using factor analysis by means of simulation, provide better cluster information. The criteria used to evaluate the goodness of fit of the methods in the simulation study were the mean percentage of clustering accuracy. The results of the simulation study showed the use of factor analysis in clustering has increased the average percentage of accuracy particularly when using Ward method. The method was taken into account to estimate the per capita expenditures based on Small Area Estimation (SAE) techniques. The method was eventually used to estimate the per capita expenditures from SUSENAS and the quality of the estimates was measured by RMSE. This research has shown that the standard-modified EBLUP model provided with factor analysis better estimates when compared with standard EBLUP model and the standard-modified EBLUP without the factor analysis. Moreover, it was also shown that the clustering information is important in estimating non sampled area.