Dummy Variable Regression Models.doc

Dummy Variable Regression Models 1. The nature of dummy variable ? In regression analysis dependent variable is influenced not only by the quantitative variables but also by the qualitative variables, such as sex, skin color, region, nationality, etc) ? Such variables usually indicate that the presence or absence of a “quality” or an attribute, they are essentially nominal scale variables. ? One way we could “quantify” such attributes is by constructing the artificial variables that taken on values 1 or 0, 1 indicating the presence of that attribute and 0 indicating the absence of that attribute. ? Variables that assume such 1 and 0 values are called dummy variable ? A regression can contain the variables that are all exclusively dummy. For example: Where Y = salary of college professor D =1 if professor is male =0 if professor is female ? Mean salary of male professor: Mean salary of female professor: ? Mean salary of female professor is given by the intercept α, and the slope coefficient βtells how much the mean salary of male professor differs from the mean salary of female professor. α+β reflects the mean salary of male professor ? Regression can contain a mixture of quantitative and qualitative variables. For example: Where Yi = salary of college professor Xi = teaching years Di = 1 if professor is male = 0 if professor is female ? Hold the same assumption as before that E（ui）=0 Mean salary of male professor: Mean salary of female professor: ? Figure ? Above model assumes that professor’s salary is the function of teaching years with the same slope but different intercept ? If is statistically significant, there would be gender discrimination ? Above dummy variable model has the following properties: (1) To distinguish two categories: male and female, we introduce a dummy variable. If we write the model like this: D2i = 1 if professor is male, = 0 otherwise D3i = 1 if professor is female, = 0 otherwise ◆ D2 and D3 hav