Wooldridge PPT ch7

A set of dummy variables because the base group is

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Unformatted text preview: a set of dummy variables 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. 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 Fall 2008 Under Econometrics Prof. Keunkwan Ryu 8 More on Dummy Interactions Formally, the model is y = β + 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 + β 1 x + u If male = 0 and hsgrad = 1 and colgrad = 0 y = β + δ 2 hsgrad + β 1 x + u If male = 1 and hsgrad = 0 and colgrad = 1 y = β + δ 1 male + δ 3 colgrad + δ 5 male*colgrad + β 1 x + u 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 + δ 1 d + β 1 x + δ 2 d*x + u If d = 0, then y = β + β 1 x + u If d = 1, then y = ( β + δ 1 ) + ( β 1 + δ 2 ) x + u This is interpreted as a change in the slope Fall 2008...
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a set of dummy variables Because the base group is...

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