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st: Interaction effects

From   Lorenzo Ciari <>
Subject   st: Interaction effects
Date   Mon, 14 Jun 2010 19:09:17 +0200

Dear users,
I have a question about the use of interaction effects. I am estimating a probit model and my dependent variable is entry (0-1) in a given market. I estimate the model using form level data, so for each firm I observe whether it enters or not a market (I have multiple markets): I want to test whether entry depends on a given variable (call it COMP) and see whether the effect of COMP on entry is particularly strong for firsm with certain characteristics (suppose the characteristics SIZE).

1) Question 1: if I want to test the hipothesis that COMP has no effect for values of SIZE lower that X, can I create a dummy = 1 for firms with size<X and then estimate a model with COMP, SIZE (continuous variable) and the interaction between (COMP) and the dummy? Can I interpret the interaction coefficient as in OLS (I wouldn't know how to use AI-Norton inteff command within this framework, as I do not interact SIZE with COMP, but the new created dummy....

2) Question2: can I, instead, put SIZE in my regression and the generate three dummies, one for low values of SIZE, one for medium and one for high values. Then I would interact COMP with the three dummies and estimate a model with three separate coefficients for COMP, that is COMPlow, COMPmedium and COMPhigh...

Thanks for help, if possible.

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