Econ418_Ch7_Dummy Variables

Econ418_Ch7_Dummy Variables - ECON 418 Introduction to...

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ECON 418 Introduction to Econometrics Anna Breman Univeristy of Arizona Part 3: Regression analysis Multiple Regression Analysis with Qualitative Information: Dummy Variables. Chapter 7 Anna Breman (Univeristy of Arizona) ECON 418 Fall 2008 1 / 22
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Chapter 7 I Dummy Variables Binary Variables: a variable that only takes on two values. Dummy Variable: A binary variable that only takes on the values zero and one. When are dummy variables used? To capture qualitative information, such as gender, race, brand, location, etc. value zero and which is assigned the value one. Anna Breman (Univeristy of Arizona) ECON 418 Fall 2008 2 / 22
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Example1 : let married be a dummy variable that is equal to 1 if the person is married and zero otherwise Example2 : let male be a dummy variable that is equal to 1 if the person is male and zero if the person is female Example3 : let treatment be a dummy variable that is equal to 1 if a person is in a treatment group and zero if the person is in the control group Any two di/erent values would do easy to interpret Anna Breman (Univeristy of Arizona) ECON 418 Fall 2008 3 ± 22
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A single dummy independent variable wage = β 0 + δ 0 female + β 1 educ + u where female = 1 when the person is female and = 0 when the person is male. δ 0 is used instead of β for the coe¢ cient on the dummy variable to highlight the interpretation. Anna Breman (Univeristy of Arizona) ECON 418 Fall 2008 4 / 22
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Interpretation of δ 0 : the di/erence in hourly wage between men and women, given the same level of education. If δ 0 < 0 , then women, on average, have a lower wage than men for the same level of education If we assume that the zero condition mean assumption holds, E ( u j female , educ ) = 0, then δ 0 = E ( wage j female = 1 , educ ) E ( wage j female = 0 , educ ) δ 0 = E ( wage j female , educ ) E ( wage j male , educ ) Anna Breman (Univeristy of Arizona) ECON 418 Fall 2008 5 ± 22
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Graphical interpretation: A dummy variable cause a shift in the intercept only The slope of the regression function remains the same.
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This note was uploaded on 05/03/2009 for the course ECON 418 taught by Professor Breman during the Spring '08 term at Arizona.

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Econ418_Ch7_Dummy Variables - ECON 418 Introduction to...

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