Economics 310

Lecture 10Dummy Variables

Dummy Variables Zero-one variables Bernoulli Variables Qualitative variables Used to handle yes-no, possess-

don’t possess try situations

Dummy Variable as only Explanatory Variable

21

1

21

)(

1

)(

0

:

t

t

t

t

ttt

yE

DWhen

yE

DWhen

DyModel

Dummy Variable as only Explanatory Variable

D=0 D=1

Y

1

1+

2

Dummy as intercept shifter

XyE

DWhen

XyE

DWhen

XDyModel

t

t

tt

t

tttt

321

31

321

)()(

1

)(

0

:

Dummy as intercept shifter

X

Y

1

21

)0,|( DXyE

)1,|( DXyE

Qualitative variable with more than 2 classes

nearitymulticolliperfect i.e.

trap.abledummy vari avoid to

classesnumber less one dummies ofNumber

...y

exclusivemutually are Classes

J classesNumber

1,11,10t

ttJJtJt XDD

Qualitative variable with more than 2 classes

X

Y

0

10

)0,0,|( 21 DDXyE

)0,1,|( 21 DDXyE

20

)1,0,|( 21 DDXyE