re: Re: st: Interaction terms

[Christopher Baum <kit.baum@bc.edu>]

<>
I have two dummies for country groups G1 and G2.

In the stata command, I could (1) interact the term so it becomes:

regress y ov edu wealth eduxG2 wealthxG2 ovxeduxG2 ovxwealthxG2

or (2) I could run: regress y ov edu wealth ovxedu ovxwealth if G1 ==1.

Would the 2nd method be wrong? What's the difference between (1) and (2)?


Obviously not the same model. If you wanted to fully interact the G1/G2 split with the model

regress y ov edu wealth ovxedu ovxwealth

it would be 

regress y i.G2##(ov edu wealth ovxedu ovxwealth)       (1)

If you then did

regress y ov edu wealth ovxedu ovxwealth if G1            (2)

you would get the same point estimates in (1) for the G1 countries as you do in (2), but the standard errors would differ.
In the pooled regression (1) you are constraining the sigma^2 to be equal across G1 and G2, whereas in (2) and the equivalent
model you could run for group G2 that constraint is not applied.

Note that the fully interacted model needs G2 by itself as well as interacted. Your model above with the "xG2" variables does not do that.

Kit

Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html




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