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Binary Response
Lecture 21
Lecture 21
Todays plan
Econ 140
Three models:
Linear probability model
Probit model
Logit model
L21.xls provides an example of a linear probability model
and a logit model
Lecture 21
Econ 140
Yi = 0 if individual:
Does not take BART
Does not buy a car
Does not join a union
Lecture 21
Graphical representation
Econ 140
0
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X
4
Econ 140
Y a bX
using a & b
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Econ 140
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McFaddens Contribution
Econ 140
0
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McFaddens Contribution
Econ 140
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CDF
Probit model
Econ 140
1
1 2
f Z
exp Z
2
2
where Z = a + bX
For the probit model, we want to find
Pr(Yi 1) F Z i
f Z i PDF , F ( Z i ) CDF
Pr( Z z ) CDF
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Econ 140
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Logit model
Econ 140
e
Density
g z
z
:
1 e
1
Cumulative:
1
G z
1 e z
Standard normal F(Z)
Logistic G(Z)
0
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Maximum likelihood
Econ 140
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Econ 140
Pr(Y 0) 1
We have an outcome
1110000100
The probability expression is:
3 1 4 1 2 4 1 6
0.4
We pick a sample of Y1.Yn
Pr Yi 1
Pr Yi 0 1
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Econ 140
Yi 1 (1Yi )
i 1
( nr )
r
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Econ 140
L r log n r log 1
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Econ 140
Pr Yi 1 G Z i
Z i a bX i
Pr Yi 0 1 G Z i
Instead of looking for estimates of
estimates of a and b
Think of G(Zi) as :
we get a log-likelihood
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Example
Econ 140
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Example (2)
Econ 140
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Comparing parameters
Econ 140
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L21.xls example
Econ 140
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Econ 140
At 20 years of experience:
Z = U = -0.923 + 0.020(20) = -0.523
eZ = e-0.523 = 0.590
g(Z) = (0.590/(1+0.590)) = 0.371
Thus the slope at 20 years of experience is:
0.371 x 0.020 = 0.007
Note the similarity (OLS value = 0.005), but for other
examples the difference can be notable.
Most software (e.g. STATA) will give the coefficient from
the logit, or the differential slope.
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