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 From "Yarbrough, Kevin T CADET MIL USA USMA" To "statalist@hsphsun2.harvard.edu" Subject st: Confusion about collinearity Date Mon, 2 Dec 2013 00:40:46 -0500

```I'm having a problem with collinearity in my difference-in-differences model. I'm using Stata 12 for Windows.

I'm using pooled cross section from a 5% sample of ACS data from 2011 to 2011 across all 50 states and Washington D.C. I'm attempting to analyze a policy implementation with the difference-in-difference(DID) identification method. 25 states have implemented this policy in different years. I'm trying to measure the effect on income. From my knowledge, a correct use of DID should result in a model: y=B0+B1(Treatment_group)+B2(post-policy year)+ B3(interaction term of treatment_group and post-policy year).

I began by creating a dummy variable for each year that equals 1 if a state had the program in that year. For example:

gen eitc00=1 if year==2000 &  (statefip==08 |statefip==11 | statefip==17 |statefip==19 | statefip==20 | statefip==23 | statefip==24 |statefip==25 |statefip==27 |statefip==34 |statefip==36 |statefip==41 | statefip==44 |statefip==50 |statefip==55)

I followed that up with this code to replace the missing values:

replace eitc00=0 if year==2000 & eitc00==.

I then created a dummy variable for years:

gen yr02=year==2002

And the interaction term between the two:

gen eitc00yr02=eitc00*yr02

My regression is

Reg lnincwage eitc00 yr02 eitc00yr02

Which results in the interaction term being omitted because of collinearity. I cannot figure out why.

Kevin

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