Lecture10 - Lecture 10: Dummy Variable Analysis Econ 444,...

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Unformatted text preview: Lecture 10: Dummy Variable Analysis Econ 444, Winter 2010 Feb 17, 2010 Few observations to keep in mind about alternative functional forms : We only consider non linearity in variables (Y and Xs). The regression equation must be linear in parameters ( s ) for OLS to work. We cannot compare equations using R 2 if they have different transformations of the dependent variable. Incorrect functional form would be very bad for predicting the future behavior based on the estimated equation. Dummy Variable 1 Motivation : At times we are faced with quantifying the effect of qualitative variables that cannot be measured/obtained in any easy way. For example- What is the effect of racial origin of workers on their wages? How returns to education differ across college and high school graduates? Is there a substantial gap in earnings between men and women in USA? Is there a substantial gap in earnings between men and women, having controlled for their education,experience etc? 2 Issue is most of the qualitative variables like gender, race, college major are categorical. For example most data reportcollege major are categorical....
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This note was uploaded on 04/13/2010 for the course ECON 444 taught by Professor Ogaki during the Winter '07 term at Ohio State.

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Lecture10 - Lecture 10: Dummy Variable Analysis Econ 444,...

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