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- hw5
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- INVESTIGATING AN ADOPTION OF SMARTPHONE: A ROAD TO UBIQUITOUS BUSINESS MANAGEMENT.
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- An Analysis of Tourism Competitiveness Index of Europe and Caucasus: A Study on the Regional Rank of the Tourism Competitiveness Index
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- Introduction to Econometrics James Stock Watson 2e Part2
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Why include a qualitative independent variable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Simplest model Simplest case . . . . . . . . . . . . . . . . . Example (continued) . . . . . . . . . . . . Possible solution: separate regressions Independent variable vs. regressor . . . Common slope model . . . . . . . . . . . Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

More general models More than one quantitative independent variable . Polytomous independent variables . . . . . . . . . . . Example (continued) . . . . . . . . . . . . . . . . . . . . Testing with polytomous independent variable . . . R commands . . . . . . . . . . . . . . . . . . . . . . . . . More than one qualitative independent variable . . Interaction Denition. . . . . . . . . . . . . . . . . . . . . . Interaction vs. correlation . . . . . . . . . . . Constructing regressors . . . . . . . . . . . . Testing . . . . . . . . . . . . . . . . . . . . . . . Principle of marginality . . . . . . . . . . . . Polytomous independent variables . . . . . Hypothesis tests . . . . . . . . . . . . . . . . . Standardized estimates. . . . . . . . . . . . . Interaction between categorical variables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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We are interested in the eect of a qualitative independent variable (for example: do men earn more than women?) We want to better predict/describe the dependent variable. We can make the errors smaller by including variables like gender, race, etc. Qualitative variables may be confounding factors. Omitting them may cause biased estimates of other coecients. 2 / 26

Simplest model

Simplest case

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Example:

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Dependent variable: income One quantitative independent variable: education One dichotomous (can take two values) independent variable: gender

Assume eect of either independent variable is the same, regardless of the value of the other variable (additivity, parallel regression lines) - See pictures from book. Usual assumptions on statistical errors: independent, zero means, constant variance, normally distributed, xed X s or X independent of statistical errors. 4 / 26

Example (continued)

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Suppose that we are interested in the eect of education on income, and that gender has an eect on income. See pictures from book. Scenario 1: Gender and education are uncorrelated

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Gender is not a confounding factor Omitting gender gives correct slope estimate, but larger errors Gender is a confounding factor Omitting gender gives biased slope estimate, and larger errors 5 / 26

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How to test for the eect of gender? If it is reasonable to assume that regressions for men and women are parallel, then it is more ecient to use all data to estimate the common slope. 6 / 26

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Independent variable = real variables of interest Regressor = variable put in the regression model In general, regressors are functions of the independent variables. Sometimes regressors are equal to the independent variables. 7 / 26

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Yi = + Xi + Di + i For women (Di = 0): Yi = + Xi + 0 + i = + Xi + i For men (Di = 1): Yi = + Xi + 1 + i = ( + ) + Xi + i See picture from book. What are the interpretations of , and ? What happens if we code D = 1 for women and D = 0 for men? 8 / 26

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Testing

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H0 : = 0, Ha : = 0 Same as before: Compute t-statistic or incremental F-test H0 : = 0, Ha : = 0 Same as before: Compute t-statistic or incremental F-test 9 / 26

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More than one quantitative independent variable

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All methods go through, as long as we assume parallel regression surfaces. Model: Yi = + 1 Xi1 + + k Xik + Di + i . Women (Di = 0): Yi = + 1 Xi1 + + k Xik + 0 + i = + 1 Xi1 + + k Xik + i

Interpretation of , 1 , . . . , k , . 11 / 26

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Qualitative variable with more than two categories Example: Duncan data:

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Dependent variable: Y =prestige Quantitative independent variables: X1 =income and X2 =education Qualitative independent variable: type (bc, prof, wc)

D1 and D2 are regressors for type: Type D1 D2 Blue collar (bc) 0 0 Professsional (prof) 1 0 White collar (wc) 0 1 If there are p categories, use p 1 dummy regressors. What happens if we use p regressors? 12 / 26

Example (continued)

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Y = + 1 X1 + 2 X2 + 1 D1 + 2 D2 + Blue collar (Di1 = 0 and Di2 = 0): Yi = + 1 Xi1 + 2 Xi2 + 1 0 + 2 0 + i = + 1 Xi1 + 2 Xi2 + i

White collar (Di1 = 0 and Di2 = 1): Yi = + 1 Xi1 + 2 Xi2 + 1 0 + 2 1 + i = ( + 2 ) + 1 Xi1 + 2 Xi2 + i 13 / 26

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Test partial eect of type, i.e., the eect of type controlling for income and education. H0 : 1 = 2 = 0 Ha : at least one j = 0, j = 1, 2. Incremental F-test:

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What do the individual p-values in summary(lm()) mean? First look at F-test, then at individual p-values 14 / 26

R commands

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Creating dummy variables by hand: D1 <- (type=="prof")*1 D2 <- (type=="wc")*1 m1 <- lm(prestigeeducation+income+D1+D2) Letting R do things automatically: m1 <- lm(prestigeeducation+income+type) m1 <- lm(prestigeeducation+income+factor(type)) The use of factor():

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factor() is not needed in this example, because the coding of the categories is in words: bc, prof, wc. It is essential to use factor() if the coding of the categories is numerical! To be safe, you can always use factor. 15 / 26

Example R-code

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Example: Y =prestige, X1 =income, X2 =education, Type D1 D2 Blue collar 0 0 Professional 1 0 White collar 0 1 and Gender D3 Women 0 1 Men Y = + 1 X1 + 2 X2 + 1 D1 + 2 D2 + 3 D3 + What is the equation for men with professional jobs? And for women with white collar jobs? 16 / 26

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Interaction

Denition

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Two variables are said to interact in determining a dependent variable if the partial eect of one depends on the value of the other. So far we only studied models without interaction. Interaction between a quantitative and a qualitative variable means that the regression surfaces are not parallel. See picture. Interaction between two qualitative variables means that the eect of one of the variables depends on the value of the other variable. Example: the eect of type of job on prestige is bigger for men than for women. Interaction between two quantitative variables is a bit harder to interpret, and we may consider that later. 18 / 26

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First, note that in general, the independent variables are not independent of each other. Correlation: Independent variables are statistically related to each other. Interaction: Eect of one independent variable on the dependent variable depends on the value of the other independent variable. Two independent variables can interact whether or not they are correlated. 19 / 26

Constructing regressors

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Y =income, X =education, D=dummy for gender Yi = + Xi + Di + (Xi Di ) + i Note X D is a new regressor. It is a function of X and D, but not a linear function. Therefore we do not get perfect collinearity. Women (Di = 0): Yi = + Xi + 0 + (Xi 0) + i = + Xi + i Men (Di = 1) Yi = + Xi + 1 + (Xi 1) + i = ( + ) + ( + )Xi + i

Interpretation of , , , . 20 / 26

Testing

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Testing for interaction is testing for a dierence in slope between men and women. H0 : = 0 and Ha : = 0. What is the dierence between:

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The model with interaction Fitting two separate regression lines for men and women 21 / 26

Principle of marginality

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First test for interaction eect. If no interaction, test and interpret main eects.

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If interaction is included in the model, main eects should also be included. See pictures of models that violate the principle of marginality. 22 / 26

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Create interaction regressors by taking the products of all dummy variable regressors and the quantitative variable. Example:

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Y = + 1 X1 + 2 X2 + 1 D1 + 2 D2 + 11 X1 D1 + 12 X1 D2 + 21 X2 D1 + 22 X2 D2 +

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Interpretation of parameters 23 / 26

Hypothesis tests

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When testing for main eects and interactions, follow principle of marginality Use incremental F-test Examples in R-code 24 / 26

Standardized estimates

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Do not standardize dummy-regressor coecients. Dummy regressor coecient has clear interpretation. By standardizing it, this interpretation gets lost. Therefore we dont standardize dummy regressor coecients. Also, dont standardize interaction regressors. You can standardize the quantitative independent variable before taking its product with the dummy regressor. 25 / 26

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male ies with 1 pregnant (not receptive) female per day male ies with 8 pregnant females per day male ies with 1 virgin (receptive) female per day male ies with 8 virgin females per day male ies without females

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See plots

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