Dear Statalist,
I have a statistical question concerning the handling of discrete
variables. I apologize if the question sounds a bit simple or is not a
direct stata question.
Suppose we have two discrete variables (y and x) with each three
categories (coded 0, 1 and 2). This results in a 3x3 contingency tabel
with m=9 different cells. Now, it seems to me, that I have two
possibilities to incorporate x and y in regression like analysis:
1) Use four dummy variables, two for x and two for y (additional we can
use interaction terms)
2) Use one dummy for each of the m-1=8 cells of the contingency tabel.
My questions are:
What are the differences between these two possibilities, what are the
effects of using more dummies in 2)?
How can I reconcile 1) and 2) ?
I would deeply appreciate any comments or references concerning the
topic above!
Thanks,
Thomas
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