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Re: st: Clustering vs. Indicator variables in a Logit


From   "Mark Schaffer" <M.E.Schaffer@hw.ac.uk>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Clustering vs. Indicator variables in a Logit
Date   Mon, 08 Nov 2004 16:24:12 -0000

David,

Subject:        	st: Clustering vs. Indicator variables in a Logit
To:             	statalist@hsphsun2.harvard.edu
From:           	DBernstein@lecg.com
Date sent:      	Mon, 8 Nov 2004 10:59:45 -0500
Send reply to:  	statalist@hsphsun2.harvard.edu

> Hello All,
> 
> I understand that clustering specifies that observations be independent
> across groups while allowing for changes in variance within a group.  My
> question is how is this different than controlling for a group with  an
> indicator (0/1) variables.
> 
> For example, If my data contains patient data for 12 hospitals and my LHS
> variable is (0/1) for recovery and my RHS variables include characteristic
> variables, treatment type, etc.  What is the difference between clustering
> on hospital or creating an indicator variable for each hospital?

The indicator variable approach is a particular functional form that 
allows for intra-group correlation.  With clustering, you allow for 
arbitrary intra-group correlation.  For example, if you were working 
with panel data, an indicator variable approach would be like 
assuming intra-group correlation that never dies out over time, 
whereas the cluster approach allows for any time of serial 
correlation within the group.

Also, as Dave pointed out, the clustering approach gives you robust 
standard errors and doesn't affect the coefficients (unless you go 
down a 2-step GMM route or something like that).

Last point - you can combine the two approaches, i.e., use indicator 
variables in the estimation, and also request standard errors that 
are robust to any intra-group correlation that the indicator variable 
approach didn't properly account for.

Hope this helps.

--Mark

> 
> Thanks in advance for any commentary,
> 
> David J. Bernstein, Ph.D.
> dbernstein@lecg.com
> 
> 
> 
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Prof. Mark E. Schaffer
Director
Centre for Economic Reform and Transformation
Department of Economics
School of Management & Languages
Heriot-Watt University, Edinburgh EH14 4AS  UK
44-131-451-3494 direct
44-131-451-3008 fax
44-131-451-3485 CERT administrator
http://www.som.hw.ac.uk/cert

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