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# Re: st: Confusion about collinearity

 From Richard Williams To statalist@hsphsun2.harvard.edu, "statalist@hsphsun2.harvard.edu" Subject Re: st: Confusion about collinearity Date Mon, 02 Dec 2013 01:15:07 -0500

```See comments below.

At 12:40 AM 12/2/2013, Yarbrough, Kevin T CADET MIL USA USMA wrote:
```
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==.
```
```
```
If I am reading this code right, then eitc00 still = missing for all years other than 2000. That means the regression will only include data from 2000. Is this really what you want? How about this instead?
```
replace eitc00 = 0 if eitc00 == .

```
```I then created a dummy variable for years:

gen yr02=year==2002
```
```
In 2000, yr02 = 0.

```
```And the interaction term between the two:

gen eitc00yr02=eitc00*yr02
```
```
```
In 2000, the interaction term = 0. In all other years it is missing since eitc00 is missing for all years besides 2000.
```
```
```My regression is

Reg lnincwage eitc00 yr02 eitc00yr02
```
```
```
In 2000, yr02 and eitc00yr02 both equal 0. All other years get dropped because eitc00 is missing for all other years.
```
```
Which results in the interaction term being omitted because of collinearity. I cannot figure out why.
```
I'm surprised only the interaction gets dropped.

```
I may be making a mistake somewhere. But have you run descriptive statistics on your created vars?
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```
As a sidelight I would use factor variable notation for my interactions and dummy variables.
```
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Richard Williams, Notre Dame Dept of Sociology
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EMAIL:  Richard.A.Williams.5@ND.Edu
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