LOGIT AND PROBIT MODELS

Diny Ghuzini
February 2009
Logit and Probit models are used to avoid the limitations
of LPM

Consider a model:
P( y  1 | x)  G( 0 1 x1...  k xk )  G(0  x )
0<G(z)<1

Functions suggested to make sure the probability between 0

and 1 are:
1. Logistic function
ez
G( z)  (cdf for standard logistic function)
1  ez
Logit model
2. Normal function
z
G ( z )  ( z )    (v)dv (cdf for standard normal function)


1 z2
 
 ( z )  (2 ) e 2 2

1
CDF

The function
increases quickly at
z=0

z
-∞ 0 ∞
Logit and Probit model can be derived from latent variable
model. Let y*: latent variable
y*  0  x  e, y  1[ y*  0]
P( y  1 | x)  P( y*  0 | x)  P[e  (0  x ) | x]
 1  G[(0  x )]  G(0  x )
Direction of xj effect on E(y*|x)=β0+xβ and on
E(y|x)=P(y=1|x)=G(β0+xβ) is always the same
But βj are not useful (refer to latent, unobservable variable)

To find partial effect:

p( x) dG
 g ( 0  x )  j where g ( z)  ( z)
x j dz
If x1 binary variable, partial effect from changing x1 from 0
to 1:
G(0  1   2 x2  ...   k xk )  G(0   2 x2  ...   k xk )

If xk discrete variable (such as number of children), partial

effect from changing xk from ck to ck +1 :
G[0  1x1  ...   k (ck  1)]  G(0  1x1  ...   k ck )
Method of estimation:
Because the function used in logit and probit model are
nonlinear, we cannot use OLS as in LPM, use maximum
likelihood estimation (MLE) instead.
This method will already account for heteroscedasticity.

To derive ML estimator:
density of yi given xi f ( y | xi ;  )  [G ( x i  )] y [1  G ( xi  )]1 y , y  0,1

Log-likelihood function ( )  yi log[ G( xi  )]  (1  yi ) log[ 1  G( xi  )]

MLE of β is derived by maximizing sum of log-likelihood for

all sample n

 (  )
i 1
If G(.) is standard logit cdf, then β is logit estimator
If G(.) is standard normal cdf, then β is probit estimator

After the standard error of each β is provided, we can

construct t test and confidence intervals as in OLS

Test multiple restrictions:

- LM test
- Wald test
- Likelihood ratio test
Estimating the effects of xj on P(y=1|x):
Pˆ ( y  1 | x)  [ g (ˆ 0 xˆ )ˆ j ]x j

often average x is used to calculate g

Logit, Probit and LPM estimates are not directly

comparable.
To compare Logit with Probit estimates:
- Multiply probit estimate by 1.6
- Multiply logit estimates by 0.625

To compare LPM with Logit and Probit estimates:

- Divide logit estimates by 4
- Divide probit estimates by 2.5
Independent variables LPM (OLS) Logit (MLE) Probit (MLE)
nwifeinc -0.0034 -0.021 -0.012
-2.267 -2.625 -2.4
educ 0.038 0.221 0.131
5.429 5.140 5.24
exper 0.039 0.206 0.123
6.5 6.4375 6.474
exper2 -0.0006 -0.0032 -0.0019
-3.333 -3.2 -3.167
age -0.016 -0.088 -0.053
-8 -5.867 -6.625
kidslt6 -0.262 -1.443 -0.868
-8.188 -7.074 -7.294
kidsge6 0.013 0.06 0.036
1 0.8 0.837
constant 0.586 0.425 0.27
3.881 0.494 0.530
Example: labor force of married woman in 1975
Results:
• Three models show consistent coefficient signs
• The same variables are stat. significant
• Coefficient magnitude not comparable

In Logit and Probit model, marginal effects not constant but

diminish
• LPM, coef kidslt6 = -0.262
one more small child reduces prob. In LF by 0.262
regardless the number of children
• Probit,
a women with nwifeinc = 20.13, educ = 12.3, exper = 10.6,
age = 42.5 (roughly sample average) and kidsge = 1 and
plug to (ˆ  ˆ x  ...  ˆ x ) Φ is CDF standard normal
0 1 1 k k

Probability of working if the woman have zero to one

small child is 0.373-0.707 = -0.334

Probability of working if the woman have one to two

small children is 0.117-0.373 = -0.256

The marginal effect of an increase in number of small

children diminishes.