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Re: st: Fixed effects model and dummy variable

From   Maarten buis <[email protected]>
To   [email protected]
Subject   Re: st: Fixed effects model and dummy variable
Date   Sat, 19 Jan 2008 23:03:16 +0000 (GMT)

--- Jong Mook Choe <[email protected]> wrote:
> I'm running a panel regression with 51 states from 1995 to 2000. 
> I need to include a dummy variable set equal to one if a state meets
> a qualification. Value of dummy variable holds for the entire period.
> So it's either 1 for the entire period or 0 for the entire period. 
> I ran fixed effects regression (xtreg, fe) but stata keeps dropping
> the dummy variable. What can I do now?

Nothing, in a fixed effect model all characteristics of states that do
not change are already controlled for. As consequence you can not enter
stata level variables that do not change over time. 

This is one reason why people use random effects models instead of
fixed effects models. In random effects models you can add this time
constant variables. However, in some (sub-sub-)disciplines random
effects models are thoroughly hated. If you happen to be in one of
those discipline you are completely dooooooomed. OK it is getting late
here, so I get a bit overly dramatic, but the point is that if you are
in such an unfortunate discipline than you can't use fixed effects
models because than you can't add the dummy you are interested in, and
you can't use random effects model because the relevant persons in your
discipline think that those models are nonsense... (fortunately, most
people and disciplines are much more pragmatic)

Hope this helps,

Maarten L. Buis
Department of Social Research Methodology
Vrije Universiteit Amsterdam
Boelelaan 1081
1081 HV Amsterdam
The Netherlands

visiting address:
Buitenveldertselaan 3 (Metropolitan), room Z434

+31 20 5986715

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