ECON
Econ 399 Chapter3c

# Econ 399 Chapter3c - Assumption MLR.3 Notes(No Perfect...

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Assumption MLR.3 Notes (No Perfect Collinearity) Perfect Collinearity can exist if: 1) One variable is a constant multiple of another 2) Logs are used inappropriately 3) One variable is a linear function of two or more other variables In general, all of these issues are easy to fix, once they are identified.

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Assumption MLR.3 Notes (No Perfect Collinearity) 1) One variable is a constant multiple of another -ie: Assume that Joe only drinks coffee at work, and drinks exactly 3 cups of coffee every day he works. Therefore: (ie) 3(work) offee C -including both coffee and work in the regression would cause perfect collinearity; the regression would fail
Notes (No Perfect Collinearity) 2) Logs are used inappropriately -Consider the following equation and apply log rules: u geek hotness u geek geek hotness u geek geek hotness ) log( ) 2 ( ) log( 2 ) log( ) log( ) log( 2 1 0 2 1 0 2 2 1 0 -a variable is included twice, causing an inability to estimate B 1 and B 2 separately -note that geek and geek 2 could both have been used, as they are not linearly related

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Notes (No Perfect Collinearity) 3) One variable is a linear function of two or more other variables
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• Spring '09
• Priemaza
• Econometrics, perfect collinearity, 3 cups, bhat, ­it, Assumption MLR.3 Notes

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