VU HOANG NAM:
I disagree with Dirk's characterization--regressing R on E/R is not
the same as regressing R2 (=R*R) on XR and E, which is not the same as
regressing R on sqrt(E) and sqrt(XR), where X is all other RHS
("independent") variables, even if only a constant term. Unless you
replace R and E/R in your specification with their logs, so that you
can add or subtract rather than multiply and divide the equation, you
cannot easily convert between functional forms.
sysuse auto, clear
g pm=pr/mpg
reg mpg pm
g mpg2=mpg^2
reg mpg2 pr
gen rootpr=sqrt(pr)
reg mpg rootpr
There are conceptual issues in regressing R on E/R that depend on your
specific application (what is your theoretical model justifying the
regression?) but there is also endogeneity induced by measurement
error in R. Normally, measurement error in the dependent variable is
of no consequence to the estimated coef, but here it is quite
problematic. Classical measurement error in E presumably has the
usual effect (bias toward zero), and can be addressed through -ivreg-
or -ivreg2- with appropriate instruments, but measurement error in R
introduces nonclassical measurement error. The problem is usually
known by the name "division bias" and frequently occurs when
regressing H (hours) on Y/H (wage rate) in labor economics, see e.g.
George J. Borjas
The Relationship between Wages and Weekly Hours of Work: The Role of
Division Bias
The Journal of Human Resources, Vol. 15, No. 3 (Summer, 1980), pp. 409-423
Eric French
The Labor Supply Response to (Mismeasured but) Predictable Wage Changes
The Review of Economics and Statistics
May 2004, Vol. 86, No. 2, Pages 602-613
On 6/26/07, Nachbar, Dirk <[email protected]> wrote:
Vu
It seems you want to regress R on E/R. Rearranging you actually regress
R on sqrt(E). So I would test which of these regressions gives you a
better fit.
Gen roote=sqrt(e)
reg r roote
reg r e
Dirk
-----Original Message-----
From: [email protected]
[mailto:[email protected]] On Behalf Of VU HOANG NAM
Sent: 26 June 2007 02:50
To: [email protected]
Subject: st: dependent as denominator on the RHS
Dear statalisters,
May I have a question regarding using dependent variable as a
denominator of one independent variable? I have searched your site but
could not find a clear answer. To be specific, this is my model:
Revenue: dependent variable
Export ratio= Export / Revenue: independent variable
I treat "export ratio" as an endogenous variable and expect it to have a
positive effect on "revenue".
Could you please tell me if I will be criticized to make my model like
this?
I have cross-section data. Can I just use normal endogenous model to run
or is there any better model?
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