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Qualitative and Limited Dependent Variable Models Chapter 18

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Binary dependent variables Many economic choices are either or; Farmers either use a computer or they dont; People either buy organic food or they dont; What are the factors that influence such decisions?

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The Linear Probability Model

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

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The Probit Model

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Maximum Likelihood Estimation What is the probability of observing three observations: yiyi xixi

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Interpretation of the Probit Model Normal pdf

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Example

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Logit model PDF: CDF

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Other Models Multinomial –Influence of individuals 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.

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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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