st: cascading dummies

[Shikha Sinha <shikha.sinha414@gmail.com>]

Hi all,

Recently, I came across a new way of creating dummies and I wonder
what the group thinks about this form.

The independent variable X is coded as 1- very poor, and 5 as very
rich. I want to estimate the effect by wealth quintile. I created the
dummy the following ways, but I was told that this is wrong (A is
wrong). The correct way to construct dummy is B and is called
cascading dummies. I have never come across this before and would
appreciate if you could shed light on the difference between the two
and which is the correct way of creating dummies.

A:							
id	Y	X1 (scale of 1-5), 	dum1	dum2	dum3	dum4	dum5
1	100	5	0	0	0	0	1
2	200	4	0	0	0	1	0
3	300	3	0	0	1	0	0
4	239	2	0	1	0	0	0
5	345	1	1	0	0	0	0


B:							
id	Y	X1 (scale of 1-5),	dum1	dum2	dum3	dum4	dum5
1	100	5	1	1	1	1	1
2	200	4	1	1	1	1	0
3	300	3	1	1	1	0	0
4	239	2	1	1	0	0	0
5	345	1	1	0	0	0	0

Thanks,
Shikha
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