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Discrete Choice Models:

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1 Discrete Choice Models:
Jacek Wallusch _________________________________ Applied Quantitative Methods Lecture 3: Discrete Choice Models: Binary Choice

2 Binary Choice ____________________________________________________________________________________________ definitions Binary 1. made up of two parts or things; twofold; double; 2. designating or of a number system in which the base used is two, each number being expressed in powers of two by using only two digits, specif. 0 and 1; Discret 1. separate and distinct (...); 2. made up of distinct parts; discontinuous; AQM: 3 Webster’s New World College Dictionary

3 either BUYING or NOT BUYING
Introduction ____________________________________________________________________________________________ binary choice Example demand for cars posibilities: either BUYING or NOT BUYING to model the demand for car simply introduce a dummy variable: AQM: 3 James Tobin (1958), Estimation of Relationship for Limited Dependent Variables, Econometrica

4 standard normal distribution logistic distribution
Models ____________________________________________________________________________________________ distributions Probit standard normal distribution Logit logistic distribution AQM: 3 n – number of estimated coefficients

5 Models ____________________________________________________________________________________________
variables Dependent variable: binary choice Explanatory variables: any variable that may explain the left-hand variable (dummy variables, variables expressed in money units etc.) AQM: 3

6 Models ____________________________________________________________________________________________
estimation methods Why not OLS? straight line vs. non-linear methods AQM: 3

7 Results ____________________________________________________________________________________________
marginal effect Probit model: no interpretation of c’s coefficients marginal effect: AQM: 3 use the sample mean values for X-variables

8 Results ____________________________________________________________________________________________
marginal effect Logit model: no interpretation of a’s coefficients marginal effect: AQM: 3 use the sample mean values for X-variables

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