<p>Your interpretation of the coefficient on Var1 or Var2 is the effect that variable has on Y <strong>if the person is in the base category</strong>. I.e., if all the categorical variable dummies were 0.</p>

<p>You are not looking at variation within each category. You are assuming that two observations within the same category but different villages <strong>are</strong> independent, unlike what you assume for two observations within the same village.</p>

<p>The categorical dummies are there to hold them constant as you look at the other variables.</p>

CC BY-SA 4.0
2018-05-05T20:44:21.597Z
2018-05-05T20:44:21.597Z
ahorn
<p>In a linear probability model, or any sort of regression, one can use fixed effect estimation by simply adding in a STATA code i.something. This "something" can be either a village, a county or a country. When doing so one look at variation within this geographical unit, as follow:</p>

<p>$Y_{ivt} = B_0 + B_1X_{it} + B_2X_{vt} + \alpha_v + \epsilon_{vit}$</p>

<p>Where indexes $_i$, $_v$ and $_t$ represent respectively individual, village and time dimensions. The term $a_v$ stands for village fixed effect thus any regression will look at within village variation. </p>

<p>STATA code (1) : reg Y Var1 Var2 i.village, vce(cluster village)</p>

<p>Here I come to the point. In the set of covariates that I am using there is one categorical variable taking several different values. This categorical variable can represent colors, insurance company or ethnicity etc. In STATA I introduce this variable as i.categorical. Thus the STATA code becomes: </p>

<p>STATA code (2) : reg Y Var1 Var2 i.categorical i.village, vce(cluster village)</p>

<p>I have a hard time interpreting the implication of this regression. When running such regression, am I looking at variation within categories within village? That is looking at variation in Y for individuals belonging to the same category within a same village. </p>

<p>Thank you!</p>

CC BY-SA 3.0
2018-04-11T19:48:32.763Z
I might have a few things to correct. Not any sort of regression but any LINEAR regression.
Marcel Campion
<microeconomics><econometrics><regression><stata>
Categorical variable as explanatory variable (right hand side)
Marcel Campion
# Categorical variable as explanatory variable (right hand side)

(Asked by: username_0 on 2018-04-11)

In a linear probability model, or any sort of regression, one can use fixed effect estimation by simply adding in a STATA code i.something. This "something" can be either a village, a county or a country. When doing so one look at variation within this geographical unit, as follow:

$Y\_{ivt} = B\_0 + B\_1X\_{it} + B\_2X\_{vt} + \alpha\_v + \epsilon\_{vit}$

Where indexes $\_i$, $\_v$ and $\_t$ represent respectively individual, village and time dimensions. The term $a\_v$ stands for village fixed effect thus any regression will look at within village variation.

STATA code (1) : reg Y Var1 Var2 i.village, vce(cluster village)

Here I come to the point. In the set of covariates that I am using there is one categorical variable taking several different values. This categorical variable can represent colors, insurance company or ethnicity etc. In STATA I introduce this variable as i.categorical. Thus the STATA code becomes:

STATA code (2) : reg Y Var1 Var2 i.categorical i.village, vce(cluster village)

I have a hard time interpreting the implication of this regression. When running such regression, am I looking at variation within categories within village? That is looking at variation in Y for individuals belonging to the same category within a same village.

Thank you!

**Tags:** microeconomics, econometrics, regression, stata

> **Comments:**
> **username_0**: I might have a few things to correct. Not any sort of regression but any LINEAR regression.  

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## 1 answers

### Answer by username_1 on 2018-05-05. Score: 0

Your interpretation of the coefficient on Var1 or Var2 is the effect that variable has on Y **if the person is in the base category**. I.e., if all the categorical variable dummies were 0.

You are not looking at variation within each category. You are assuming that two observations within the same category but different villages **are** independent, unlike what you assume for two observations within the same village.

The categorical dummies are there to hold them constant as you look at the other variables.


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