Centre for Statistical & Survey Methodology Working Paper Series

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If unit-level data are available, Small Area Estimation (SAE) is usually based on models formulated at the unit level, but they are ultimately used to produce estimates at the area level and thus involve area-level inferences. This paper investigates the circumstances when using an area-level model may be more effective. Linear mixed models fitted using different levels of data are applied in SAE to calculate synthetic estimators and Empirical Best Linear Unbiased Predictors (EBLUPs). The performance of area-level models is compared with unit-level models when both individual and aggregate data are available. A key factor is whether there are substantial con- textual effects. Ignoring these effects in unit-level working models can cause biased estimates of regression parameters which is referred to as the ecological fallacy. The contextual effects can be automatically accounted for in the area-level models. Using synthetic and EBLUP techniques, small area estimates based on different levels of linear mixed models are studied in a simulation study.