Econometrics - Linear Regression
3 important questions on Econometrics - Linear Regression
Why can you not have two dummy variables in a model?
Perfect multicollinearity:
mani + womani = 1 for all i
mani + womani = 1 for all i
How to prevent multi collinearity with dummy variables?
- Leave out the constant:
- Disadvantage is that it is more difficult to test for differences between the parameters
- R^2 doesnt work (it only works with regressions with an intercept.
2. Leave out one of the dummies
Where does panel data come in handy?
- Vary across entities but not vary over time
- Unobserved/unmeasured data, but omitting could cause omitted variable bias.
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