Wooldridge PPT ch7

# Because the base group is represented by the

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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.

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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
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

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Fall 2008 Under Econometrics Prof. Keunkwan Ryu

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