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Wk5 Nonlinear Models

# Wk5 Nonlinear Models - I nt r oduct i on t o Econom r i cs...

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I nt r oduct i on t o Economet r i cs Spr i ng 2010 Wk5. Nonl i near Model s & Dummy Regr essi ons

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2 Nonl i near Model s I n r egr essi on anal ysi s, one can t ake l ogs of var i abl es and/ or use quadr at i cs t o make non- l i near model s l i near or t o make l i near model s non- l i near . We have al r eady seen how t o make non- l i near model s l i near by t aki ng l ogs ( e. g. l og( wage) = f ( educat i on) )
3 Taki ng l ogs I ncor por at i ng nonl i near i t i es i n si mpl e r egr essi ons gi ves t he f ol l owi ng i nt er pr et at i ons:

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4 Maki ng l i near model s non- l i near Anot her common way i s t o use quadr at i cs e. g. wage = β 1 + β 2 exper + β 3 exper 2 + u What t hi s does i s t o “ bend” t he l i near r egr essi on, such t hat exper i ence exhi bi t s di m i ni shi ng r et ur ns ( i f β 2 <0) , whi ch i s mor e r eal i st i c. Anot her model t hat gi ves si m i l ar r esul t s i s wage = β 1 + β 2 l n( exper ) + u R- squar e or adj ust ed R- squar e can be
5 Her e’ s anot he r exampl e

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6
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Wk5 Nonlinear Models - I nt r oduct i on t o Econom r i cs...

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