Model invariance when estimating random parameters with categorical variables

Michael Burton

No 273051, Working Papers from University of Western Australia, School of Agricultural and Resource Economics

Abstract: This paper shows that econometric models that include categorical variables are not invariant to choice of ‘base’ category when random parameters are estimated, unless they are allowed to be correlated. We show that the invariance can lead to significant increases in Type I errors, and distortions in the implied behaviour of respondents. We hypothesise that these biases may influence the economic policy implications of published models that contain this error, but it’s impossible to be sure without re-estimating the model correctly.

Keywords: Research; Methods/Statistical; Methods (search for similar items in EconPapers)
Pages: 11
Date: 2018-05-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Model invariance when estimating random parameters with categorical variables (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwauwp:273051

DOI: 10.22004/ag.econ.273051

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