Consistent underestimation bias, the asymmetrical loss function, and homogeneous sources of bias in state revenue forecasts

Abstract

One component of revenue forecast error has been attributed to the phenomena of consistent underestimation bias due asymmetrical loss. Because underestimation of revenue forecast results in less loss to forecasters than overestimations, there appears to be a bias for forecasters to underestimate revenue forecasts. This paper confirms this hypothesis. Additionally, with the greater usage of national forecasting organizations that provide economic forecasts on which revenue forecasts are based, a secondary source of forecaster bias may be present in many state level forecasts. This hypothesis is supported by the increase in number of states using such organizations and a decrease in the standard deviation of the annual mean percentage state forecast error.

Citation

Voorhees, W.R. (2006), "Consistent underestimation bias, the asymmetrical loss function, and homogeneous sources of bias in state revenue forecasts", Journal of Public Budgeting, Accounting & Financial Management, Vol. 18 No. 1, pp. 61-76. https://doi.org/10.1108/JPBAFM-18-01-2006-B003