Re: st: How to correctly code categorical variables effects in FE/RE model

[Nick Cox <njcoxstata@gmail.com>]

I am not an economist, and Maarten will deny it too, but it seems
crazy to ask for year effects and not show them. There should surely
be some pattern that bears economic interpretation. Conversely, if
they don't make sense, you don't have a reportable model.
Nick
njcoxstata@gmail.com


On 20 August 2013 14:45, Herman Haugland <herman.haugland@gmail.com> wrote:
> Thank you very much Nick and Maarten!  One related question, how would
> you report those year effects? I am asking because I am basing my
> analysis on studies that just say: Year effects? Yes/No.
>
> Is that the correct way to do it?  I mean, I code the year effects, I
> get the values for my variables of interest, and then:
>
> a) Should I conclude based on the values of those variables of
> interest only?  OR
> b) Should I say something about the coefficients for the years?
>
> One last newbie question, for the years, does it matter whether I take
> the real value of the year (e.g. 1991), or should I code them as
> categorical variables? I suppose is the same, since years have a
> natural order, but I just want to make sure I am doing it right.
>
> Thanks for your time and consideration.
>
>
>
>
> Med vennlig hilsen / Best regards,
>
> Herman Haugland
>
> ________________
>
> Contact Information:
>
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> E-mail: herman.haugland@gmail.com
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>
> On Tue, Aug 20, 2013 at 3:36 PM, Maarten Buis <maartenlbuis@gmail.com> wrote:
>> On Tue, Aug 20, 2013 at 3:18 PM, Herman Haugland wrote:
>>> Suppose that I want to test for the year effects in the regression.
>>> I, so far, have been doing the following:
>>>
>>> xtreg y x i.year, fe
>>>
>>> But reading here (sorry for citing Wikipedia):
>>> http://en.wikipedia.org/wiki/Categorical_variable#Effects_coding
>>>
>>> It seems I am doing it the wrong way.
>>>
>>> How would you correctly code categorical variables (year) effects in Stata?
>>
>> You did it right. Effect coding is just another way of representing
>> exactly the same model. Say we have two groups (years), 1 and 2 and
>> they are of equal size and year 1 has a value of 3 and year 2 a value
>> of 5. We could say the overall mean is 4 and year 1 defiates -1 from
>> that mean and year 2 deviates +1 from that mean. That would be effect
>> coding. We could also say that year 1 has a value of 3 and year two
>> deviates +2 from that value. That would be the default with factor
>> variable notation. Notice that these are just different ways of saying
>> exactly the same thing.
>>
>> You could get effect coding with -contrast-, which can sometimes help
>> as that comparison fits a particular application better. It is
>> certainly not a case of "correct" versus "incorrect" way of doing
>> things, as the models are just mathematically equivalent.
>>
>> -- Maarten
>>
>> ---------------------------------
>> Maarten L. Buis
>> WZB
>> Reichpietschufer 50
>> 10785 Berlin
>> Germany
>>
>> http://www.maartenbuis.nl
>> ---------------------------------
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