INTRODUCTION TO ECONOMETRICS II ECO 306 NOUN 134
Unit 2: Binary Choice and LimitedDependent Models andMaximum Likelihood Estimation CONTENTS 5.2.1.0
Introduction 5.2.2.0 Objectives
5.2.3.0 Main Content
5.2.3.1
The Linear Probability Model 5.2.3.2 Goodness of Fit and Statistical Tests
5.2.4.0 Summary
5.2.5.0
Conclusion 5.2.6.0 Tutor-Marked Assignment
5.2.7.0 References/Further Reading
5.2.1.0 INTRODUCTION Most times economists are known to be interested in the factors behind the decision- making of individuals or enterprises. Examples are
- Why do some people go to college while others do not
- Why do some women enter the labour
force while others do not - Why do some people buy houses while others rent
- Why do some people migrate while others stay put Models have been developed to proffer solutions to these interest, and they are known as abinary choice or qualitative response models. The
outcome will be denoted by Y, and assigned a value of 1 if the event occurs and 0 otherwise. Models with more than two possible outcomes have also been developed, but let us restrict our scope to abinary choice. The linear probability model apart, binary choice models are fitted using maximum likelihood estimation.
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