Consider the FayHerriot model in (14.5). Suppose that d , 2 v , and are known.
Question:
Consider the Fay–Herriot model in (14.5). Suppose that ψd , σ2 v , and β are known.
a. Let
b. Show that VM [˜θd (a)−θd ] is minimized when a = αd and that VM [˜θd (αd )−θd ] = αdψd . Consequently, under the model, VM [˜θd (αd ) − θd ] ≤ VM[d − θd ].
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