Binary

Dependent
Variables
 Binary Dependent Variable
Model

• Economic Model wherein the dependent variable is

restricted to being a 0 or 1:
 Yi = 1 if individual i is enrolled in school.
 Yi = 0 if individual i is NOT enrolled in school.

 Yt = 1 if an economy is in recession at time t.

 Yt = 0 if an economy is NOT in recession at time t.
 Interpretation

• Yi dummy variable represents the probability of observing

a 1 vs. a 0, conditional on values of independent variables
Xi.

• P Yi = 1 Xi the probability of success is a linear function of

the Xi.

• Goal of regression is to determine impact of a change in Xi

on P Yi = 1 Xi
 • Use OLS regression with Binary Dependent Variable
• It is called because the response probability is linear in
Linear the parameters
• Achieves consistent estimates of desired marginal
Probability effects:

Model
 P Yi = 1 Xi = 𝛽0 + 𝛽1𝑋𝑖 + ⋯ + 𝛽𝑘𝑋𝑖𝑘
(LPM)
 Linear Probability Model

P(Yi  1 X i ) ^
 1
X 1i
 It measures the change in the probability of success
when independent variables changes, holding other
factors fixed.
 Example

• Labor force participation decision by married women.

• Dependent variable is inlfi:

Inlfi = 1 when in labor force

0 when not in labor force

• Independent variables: agei, educi, experi, kidslt6i (number

of kids less than 6 in the household)
 • Model:
Inlf = 𝛽0 + 𝛽1𝑎𝑔𝑒𝑖 + 𝛽2𝑒𝑑𝑢𝑐𝑖 + 𝛽1𝑒𝑥𝑝𝑒𝑟𝑖 + 𝛽1𝑘𝑖𝑑𝑠𝑙𝑡6𝑖 … + 𝜇𝑖

Linear
Probability
• Estimated Model:
Model (LPM) Inlf =0.796 − 0.019𝑎𝑔𝑒𝑖 + 0.034𝑒𝑑𝑢𝑐𝑖 + 0.023𝑒𝑥𝑝𝑒𝑟𝑖 − 0.278𝑘𝑖𝑑𝑠𝑙𝑡6𝑖
(0.000) (0.000) (0.000) (0.000) (0.000)

N = 753 R2 = 0.2480 Adjusted R2 = 0.2440

Note: 𝜌 − 𝑣𝑎𝑙𝑢𝑒 in parenthesis

 • Estimated Model:

Inlf =0.796 − 0.019𝑎𝑔𝑒𝑖 + 0.034𝑒𝑑𝑢𝑐𝑖 + 0.023𝑒𝑥𝑝𝑒𝑟𝑖 − 0.278𝑘𝑖𝑑𝑠𝑙𝑡6𝑖

(0.000) (0.000) (0.000) (0.000) (0.000)

Linear N = 753 R2 = 0.2480 Adjusted R2 = 0.2440

Probability Note: 𝜌 − 𝑣𝑎𝑙𝑢𝑒 in parenthesis

Model Interpretation: (for the coefficient of educ)

(LPM) Another year of education increases

the probability of labor force
participation by 0.034, holding other
factors fixed.
 Linear Probability Model
(LPM)
• Estimated Model:

Inlf =0.796 − 0.019𝑎𝑔𝑒𝑖 + 0.034𝑒𝑑𝑢𝑐𝑖 + 0.023𝑒𝑥𝑝𝑒𝑟𝑖 − 0.278𝑘𝑖𝑑𝑠𝑙𝑡6𝑖

(0.000) (0.000) (0.000) (0.000) (0.000)

N = 753 R2 = 0.2480 Adjusted R2 = 0.2440

Note: 𝜌 − 𝑣𝑎𝑙𝑢𝑒 in parenthesis

Interpretation: (for the coefficient of kidslt6)

Having one additional child less than 6 years

old reduces the probability of participation by
0.278, at a given levels of the other variables.