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Qualitative and Limited Dependent Variable Models

Qualitative and Limited Dependent Variable Models. Chapter 18. Binary dependent variables. Many economic choices are either or; Farmers either use a computer or they don’t; People either buy organic food or they don’t; What are the factors that influence such decisions?.

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Qualitative and Limited Dependent Variable Models

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  1. Qualitative and Limited Dependent Variable Models Chapter 18

  2. Binary dependent variables • Many economic choices are either or; • Farmers either use a computer or they don’t; • People either buy organic food or they don’t; • What are the factors that influence such decisions?

  3. The Linear Probability Model

  4. Problems with the LPM • Heteroscedasticity • Implausible predicted values • a consequence of the linear relationship.

  5. The Probit Model

  6. Maximum Likelihood Estimation What is the probability of observing three observations:

  7. Interpretation of the Probit Model Normal pdf

  8. Example

  9. Logit model PDF: CDF

  10. Other Models • Multinomial • Influence of individual’s attribute on choice of shop. • Influence of product attributes on choice of product (choice experiments, conjoint analysis) • Multinomial logit, conditional logit, multinomial probit. • Ordered choice • Strongly disagree, disagree neutral etc. • Ordered probit/logit. • Count data • Number of trips to the supermarket. • Poisson regression.

  11. Limited Dependent Variables • Tobit • Deals with the problem of censoring at zero. • Subsistence farmers sales on the market. • OLS is biassed • Sample selection • Average earnings of women. • Heckman procedure • equation 1: probit to explain participation. • equation 2: least squares wage equation including the inverse mills ratio.

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