AnswerBun.com

Categorical variable as explanatory variable (right hand side)

In a linear probability model, or any sort of regression, one can use fixed effect estimation by simply adding in a STATA code i.something. This “something” can be either a village, a county or a country. When doing so one look at variation within this geographical unit, as follow:

$Y_{ivt} = B_0 + B_1X_{it} + B_2X_{vt} + alpha_v + epsilon_{vit}$

Where indexes $_i$, $_v$ and $_t$ represent respectively individual, village and time dimensions. The term $a_v$ stands for village fixed effect thus any regression will look at within village variation.

STATA code (1) : reg Y Var1 Var2 i.village, vce(cluster village)

Here I come to the point. In the set of covariates that I am using there is one categorical variable taking several different values. This categorical variable can represent colors, insurance company or ethnicity etc. In STATA I introduce this variable as i.categorical. Thus the STATA code becomes:

STATA code (2) : reg Y Var1 Var2 i.categorical i.village, vce(cluster village)

I have a hard time interpreting the implication of this regression. When running such regression, am I looking at variation within categories within village? That is looking at variation in Y for individuals belonging to the same category within a same village.

Thank you!

Economics Asked by Marcel Campion on December 29, 2020

1 Answers

One Answer

Your interpretation of the coefficient on Var1 or Var2 is the effect that variable has on Y if the person is in the base category. I.e., if all the categorical variable dummies were 0.

You are not looking at variation within each category. You are assuming that two observations within the same category but different villages are independent, unlike what you assume for two observations within the same village.

The categorical dummies are there to hold them constant as you look at the other variables.

Answered by ahorn on December 29, 2020

Add your own answers!

Related Questions

Railway Mania in England

1  Asked on February 4, 2021 by r_quester

 

Thesis-advisor/student pairs that won the nobel prize

4  Asked on February 4, 2021 by ubiquitous

 

How to find US total debt?

2  Asked on February 3, 2021 by dale-baker

   

Ask a Question

Get help from others!

© 2022 AnswerBun.com. All rights reserved.