Consider the binary variable version of the fixed effects model with an additional regressor, D1; that is, let Yit = β0 + β1Xit + γ1D1i + γ2D2i +...+ γnDni + ui. a) Suppose that n = 3. Show that the binary regressors and the “constant” regressor are perfectly multicollinear; that is, express one of the variables D1i , D2i, D3i, and X0it as a perfect linear function of the others, where X0it = 1 for all i,t. b) Show the result in (a) for general n. c) What will happen if you try to estimate the coefficients of the regression by OLS?

Consider the binary variable version of the fixed effects model with an additional regressor, D1; that is, let Yit = β0 + β1Xit + γ1D1i + γ2D2i +...+ γnDni + ui. a) Suppose that n = 3. Show that the binary regressors and the “constant” regressor are perfectly multicollinear; that is, express one of the variables D1i , D2i, D3i, and X0it as a perfect linear function of the others, where X0it = 1 for all i,t. b) Show the result in (a) for general n. c) What will happen if you try to estimate the coefficients of the regression by OLS?

Micro Economics For Today

10th Edition

ISBN:9781337613064

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter1: Introducing The Economic Way Of Thinking

Section1.A: Applying Graphs To Economics

Problem 6SQ

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