STATA continued..

Yrgalem D.
Raya university
 Discrete Response models

So far the dependent variable (Y) has been continuous: such

as
 Determinant of income, education, agriculture output
What if the dependent variable is discrete.
Generally discrete dependent variables can be classified
1. Binary response models (Whether a firm exports, or a
farmer has adopted a technology)
2. Multinomial response models (whether an individual is
in wage employment, unemployed or in self-
employment)
3. Ordered response models (e.g. Credit ratings from A to
D)
 Binary dependent variable
To day we are going to see binary dependent
variable in order to understand the effect of X
on a binary dependent variable:
 Y = get into college, or not
 Y = willing to pay, or not
 Y = adoption, or not
 The linear probability model
• When we apply OLS to binary dependent variable
• i.e. when Y is binary, the linear regression model
Yi = 0 + 1Xi + ui
is called the linear probability model.
• The predicted value is a probability:
• E(Y|X=x) = Pr(Y=1|X=x)
= prob. that Y = 1 given x
• = the predicted probability that Yi = 1, given X
 The linear probability model
• Jj
 The linear probability model….
 simple to estimate and to interpret
• OLS is inefcient (based on homoskedasticity,
normality)
• Possible to get probability < 0 or > 1. This makes
no sense—you can't have a probability below 0 or
above 1.
• This is a fundamental problem with the LPM that
we can't patch up.
• These disadvantages can be solved by using a
nonlinear probability model: probit and logit
regression
 LPM Vs probit and logit…….
• a graph of a case where LPM goes
wrong and the logit(probit).
 probit model
• models the probability that Y=1 using the
cumulative standard normal distribution function,
evaluated at z = 0 + 1X:
• Pr(Y = 1|X) = (0 + 1X)
•  is the cumulative normal distribution
function.
• z = 0 + 1X is the “z-value” or “z-index” of the
probit model.
• Since it is a nonlinear model, it cannot be
estimated by our usual methods
• Use maximum likelihood estimation
 Logit model
• Another common choice for G(z) is the logistic
function, which is the cdf for a standard logistic
random variable
• the probability of Y=1 as the cumulative standard
logistic distribution function, evaluated at y = 0 + 1X:
Pr(Y = 1|X) = F(0 + 1X)
• F is the cumulative logistic distribution function:

F(0 + 1X) =

• This case is referred to as a logit model, or sometimes

as a logistic regression
 probit and logit
• Both functions have similar shapes
• Both the probit and logit are nonlinear and
require maximum likelihood estimation
• No real reason to prefer one over the other but
• Traditionally saw more of the logit, mainly
because the logistic function leads to a more
easily computed model
• Today, probit is easy to compute with standard
packages, so more popular
 probit and logit
• In general we care about the effect of x on P(y
= 1|x), that is, we care about ∂p/ ∂x
• For the linear case, this is easily computed as
it is the coefficient on x
• For the nonlinear probit and logit models, it’s
more complicated:
• ∂p/ ∂xj = g(0 +x)j, where g(z) is dG/dz
probit and logit…….
• in both cases the estimated coefficients look very
different from those of the OLS linear probability
estimates.
• This is because they do not have the same
interpretation as with OLS (they are simply values
that maximum the likelihood function).
• To obtain coefficients which can be interpreted in a
similar way to OLS, need marginal effects
• To obtain marginal effects in Stata run either the
logit or probit command then simply type mfx
probit and logit…….
• In both cases the interpretation of these marginal
effects is the impact that a unit change has on the
probability of belonging to the treatment group
(just like OLS coefficients)
• because OLS is a linear estimator the estimated
marginal effect is the same at every set of X
values. (reg and mfx are equal), unlike with logit
and probit.
 Whereas the cofecients from logit and probit will
differ due to scaling, the marginal efects should
be almost identical.
 Logit model in STATA……….
• Stata provides two equivalent commands for
the binary logit model that present the same
result in different ways.
• The logit command produces coefficients with
respect to logit (log of odds), while logistic
reports odd ratios.
• A coefficient of logit is the corresponding
logarithmic transformed odds ratio of logistic.
 Logit model in STATA……….
• The both commands are followed by the
dependent variable, a set of independent
variables, and a series of options after a
comma.
• Example in oure case;
 logit wtp GEN AG MRS
logistic wtp GEN AG MRS
Logit model in STATA……….

example, 2.07321= ln(7.950299).

Logit model in STATA….
• To see the magnitude of the effect of the explanatory variables
to the household’s WTP we have to see the computed
marginal effect.

• The interpretation of the marginal effects shows the

change in the probability of an event due to a unit
change in the continuous explanatory variables for the
continuous variables.
• and the change of dummy variables from 0 to 1 for
discrete variables.
 Probit model in STATA……….
• Stata provides commands for the binary probit
model; probit
• probit wtp GEN AG MRS
• To see the magnitude of the effect of the
explanatory variables to the household’s WTP
we have to see the computed marginal effect
 mfx
Probit model in STATA……….
Tobit model
• A limited dependent variable may take either
zero or positive continuous values. In such
situation Tobit estimation is appropriate.
• Can also have latent variable models that don’t
involve binary dependent variables
• Say y* = x + u, u|x ~ Normal(0,s2)
• But we only observe y = max(0, y*)
• The Tobit model uses MLE to estimate both 
and s for this model
• Important to realize that  estimates the effect
of x on y*, the latent variable, not y