TESTING FOR MULTICOLLINEARITY AND ITS REMEDIES

Model Summary
Model

.737a

R Square

Adjusted R

Std. Error of the

Square

Estimate

.543

.502

.52614

a. Predictors: (Constant), Informational justice, Distributive justice,

Interactive justice , Procedural justice

ANOVAa
Model

Sum of Squares

df

Mean Square

Regression

14.803

3.701

Residual

12.457

45

.277

Total

27.261

49

Sig.
.000b

13.369

a. Dependent Variable: Job satisfaction

b. Predictors: (Constant), Informational justice, Distributive justice, Interactive justice ,
Procedural justice

Coefficientsa
Model

Unstandardized Coefficients

Standardized

Sig.

Collinearity Statistics

Coefficients
B

Std. Error

(Constant)

.358

.569

Distributive justice

.146

.120

Procedural justice

.076

Interactive justice
Informational justice
a. Dependent Variable: Job satisfaction

Beta

Tolerance

VIF

.630

.532

.170

1.218

.229

.523

1.913

.147

.110

.521

.605

.227

4.398

.237

.128

.306

1.848

.071

.369

2.710

.282

.135

.292

2.090

.042

.520

1.925

EVALUATION
The explanatory variable DJ 0.523 has moderate degree tolerance and has moderate
multicollinearity, procedural justice and interactive justice 0.227, 0.369 have low degree
tolerance and high degree multicollinearity whereas informational justice INJ 0.520 has
moderate degree of tolerance and moderate multicollinearity because of closer to1.
The explanatory variable DJ having high multicollinearity i.e VIF 1.913, PJ having very high
multicollinearity i.e VIF 4.398, IJ having high multicollinearity i.e VIF 2.710, and INJ having
high multicollinearity i.e VIF 1.529.
MULTICOLLINEARITY REMEDIES
1: Do nothing
Being an Econometrics student, one solution is that to do nothing. i.e
Dont interfere in model. This remedies are adopted by many
Econometricians(i.e Koutsoyiannis, Gujrati etc)
2: Increase the sample size (n)
By increasing the number of observation, this problem either totally
solved or minimized, Hence increasing the sample size is a comparatively
a good solution for removal of multi-collinearly.
3: Dropping one variable
By dropping one variable (which is not more important for study) which is
multi-collinear, this problem can be solved. E.g. The consumption function
in case of wealth (X1) and Income (X2).
Yi = 0+1X1+2X2+ei
Here X1 is not an important variable as Income X2. So by dropping
X2 variable from model, the problem will be removed.
Yi = 0+1X+ei (New Model)
4: Taking log of variable
By taking log of data, the correlation between Xs can be removed or
minimized because log make data more minimum.
E.g: log Y = 0+1logX1+2logX2+ei
5: Ratio transformation
One solution of removal of strong correlation between Xs by dividing
whole model by an explanatory variable.
E.g: Yi = 0+1X1+2X2+ei --------- (A)
Where, Y= Consumption

X1= Population
X2= Net Income
Dividing equation (A) by X
Yi/x = 0/x+1X1/x+2X2/x+ei/x
Yi = 0+1X1+2X2+ei ---------- (B)
Where, Yi = Per Person Consumption
X1 = Reciprocal of Population
X2 = Per Capita Income
6: Taking differences
By taking differences the problem of multi collinearity can be removed.
E.g: Let Yt = 0+1X1t+2X2t+eit --------- (A)
The 1st difference of the above model will be,
Yt-1 = 0+1X1t-1+2X2t-1+eit-1 -------- (B)
By taking difference of (A) and (B)
Yt-Yt-1 = 0+1(X1t-X1t-1)+2(X2t-X2t-1)+eit-et-1
Yt = 0+1X1t+2X2t+et

Collinearity Diagnosticsa
Model

Dimension

Eigenval

Condition Index

ue

Variance Proportions
(Constant)

Distributive

Procedural

Interacti

justice

justice

ve

Inf

justice

4.944

1.000

.00

.00

.00

.00

.022

14.858

.44

.04

.10

.03

.014

18.488

.12

.54

.04

.14

.014

18.518

.00

.00

.04

.20

.005

32.083

.44

.42

.83

.63

Collinearity Diagnosticsa
Model

Dimension

Eigenvalue

Variance Proportions

Condition Index
(Constant)

Distributive

Procedural

Interactive

justice

justice

justice

4.944

1.000

.00

.00

.00

.00

.022

14.858

.44

.04

.10

.03

.014

18.488

.12

.54

.04

.14

.014

18.518

.00

.00

.04

.20

.005

32.083

.44

.42

.83

.63

a. Dependent Variable: Job satisfaction