Shrinkage Estimation in Multilevel Normal Models

This review traces the evolution of theory that started when Charles Stein in 1955 [In Proc. 3rd Berkeley Sympos. Math. Statist. Probab. I (1956) 197--206, Univ. California Press] showed that using each separate sample mean from $k\ge3$ Normal populations to estimate its own population mean $μ_i$ can be improved upon uniformly for every possible $μ=(μ_1,...,μ_k)'$. The dominating estimators, referred to here as being "Model-I minimax," can be found by shrinking the sample means toward any constant vector. Admissible minimax shrinkage estimators were derived by Stein and others as posterior means based on a random effects model, "Model-II" here, wherein the $μ_i$ values have their own distributions. Section 2 centers on Figure 2, which organizes a wide class of priors on the unknown Level-II hyperparameters that have been proved to yield admissible Model-I minimax shrinkage estimators in the "equal variance case." Putting a flat prior on the Level-II variance is unique in this class for its scale-invariance and for its conjugacy, and it induces Stein's harmonic prior (SHP) on $μ_i$.

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