Because the base group is represented by the

This preview shows page 6 - 12 out of 17 pages.

Because the base group is represented by the intercept, if there are n categories there should be n – 1 dummy variables If there are a lot of categories, it may make sense to group some together Example: top 10 ranking, 11 – 25, etc.
Image of page 6

Subscribe to view the full document.

Fall 2008 Under Econometrics Prof. Keunkwan Ryu 7 Interactions Among Dummies Interacting dummy variables is like subdividing the group Example: have dummies for male, as well as hsgrad and colgrad Add male*hsgrad and male*colgrad, for a total of 5 dummy variables –> 6 categories Base group is female HS dropouts hsgrad is for female HS grads, colgrad is for female college grads The interactions reflect male HS grads and male college grads
Image of page 7
Fall 2008 Under Econometrics Prof. Keunkwan Ryu 8 More on Dummy Interactions Formally, the model is y = β 0 + δ 1 male + δ 2 hsgrad + δ 3 colgrad + δ 4 male*hsgrad + δ 5 male*colgrad + β 1 x + u, then, for example: If male = 0 and hsgrad = 0 and colgrad = 0 y = β 0 + β 1 x + u If male = 0 and hsgrad = 1 and colgrad = 0 y = β 0 + δ 2 hsgrad + β 1 x + u If male = 1 and hsgrad = 0 and colgrad = 1 y = β 0 + δ 1 male + δ 3 colgrad + δ 5 male*colgrad + β 1 x + u
Image of page 8

Subscribe to view the full document.

Fall 2008 Under Econometrics Prof. Keunkwan Ryu 9 Other Interactions with Dummies Can also consider interacting a dummy variable, d , with a continuous variable, x y = β 0 + δ 1 d + β 1 x + δ 2 d*x + u If d = 0, then y = β 0 + β 1 x + u If d = 1, then y = ( β 0 + δ 1 ) + ( β 1 + δ 2 ) x + u This is interpreted as a change in the slope
Image of page 9
Fall 2008 Under Econometrics Prof. Keunkwan Ryu 10 y x y = β 0 + β 1 x y = ( β 0 + δ 0 ) + ( β 1 + δ 1 ) x Example of δ 0 > 0 and δ 1 < 0 d = 1 d = 0
Image of page 10

Subscribe to view the full document.

Fall 2008 Under Econometrics Prof. Keunkwan Ryu
Image of page 11
Image of page 12

{[ snackBarMessage ]}

Get FREE access by uploading your study materials

Upload your study materials now and get free access to over 25 million documents.

Upload now for FREE access Or pay now for instant access
Christopher Reinemann
"Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

Ask a question for free

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern