Thus, we use basically the same information/data as in traditional regression analysis, but now are able to simultaneously estimate discrete groups or clusters of firms, their sizes and membership, as well as the group level regression coefficients.
Note that once estimates of l k ; s2
k ; and b jk are obtained within any iterate, one can
assign each firm i to each cluster or group k (conditioned on these estimates) using
Bayes’ rule via the estimated posterior probability: