Econ 399 Chapter7a - 7 Dummy Variables Thus far, we have...

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7 Dummy Variables Thus far, we have only considered variables  with a QUANTITATIVE MEANING -ie: dollars, population, utility, etc. In this chapter we will cover variables with a  QUALITATIVE meaning -ie: gender, location, race, specific  knowledge or attribute
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7. Dummy Variables 7.1 Describing Qualitative Information 7.2 A Single Dummy Independent Variable 7.3 Using Dummy Variables for Multiple Categories 7.4 Interactions Involving Dummy Variables 7.5 A Binary Dependent Variable: The Linear Probability Model 7.6 More on Policy Analysis and Program Evaluation
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7.1 Describing Qualitative Information Any study where an observation has a  quality that can be described as either  has/does not have, is/is not, does/does not  etc. can be expressed as a DUMMY  VARIABLE (DV) or BINARY VARIABLE Ie:  -has or does not have a high school  diploma -is or is not male -is or is not in Ontario -does or does not smoke
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7.1 Describing Qualitative Information Binary variables generally take on either a  zero or one value to make them easier to  interpret in regressions.  Often the name of  the Dummy Variable indicates what value  takes a 1: Female  = 1 if female = 0 otherwise Single = 1 if single = 0 otherwise
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7.2 Single Dummy Variables -Consider the following model where knowledge  of the world is a function of reading and  travelling: u Travel Books WKnow + + + = δ β 1 0 -where our Dummy Variable, Travel = 1 if you’ve  travelled outside Canada and =0 otherwise -delta is therefore the difference in world  knowledge between those who have travelled  and those who have not, GIVEN the same  number of books read
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7.2 Single Dummy Variables -Mathematically, ) | | ( ) , | ( books notravel Wknow E books travel Wknow E - = δ -The dummy variable causes an INTERCEPT  SHIFT, independent on the number of books  read -this inclusion of a dummy variable has no impact  on any slopes; the impact of an additional book  is the same for a traveller as for a non-traveller
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7.2 Dummy Variable Trap -When two Dummy Variables relating to the  same aspect are included, such as travel  and notravel, we cause perfect collinearity  because travel+notravel=1 -this is the DUMMY VARIABLE TRAP that  arises when too many DV’s are included -The DV Trap can also occur when there  are too many DV’s relative to the different  number of observations
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7.2 All your base are belong to us
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This note was uploaded on 03/14/2009 for the course ECON ECON 399 taught by Professor Priemaza during the Spring '09 term at University of Alberta.

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Econ 399 Chapter7a - 7 Dummy Variables Thus far, we have...

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