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Confounded Coefficients: Accurately Comparing Logit and Probit Coefficients across Groups

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Hoetker, Glenn (U of Illinois)

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Abstract

The logit and probit models are critical parts of the management researcher's analytical arsenal. We often want to know if a covariate has the same effect for different groups, e.g., foreign and domestic firms. Unfortunately, many attempts to compare the effect of covariates across groups make the unwarranted assumption that each group has the same residual variation. If this is not the case, comparisons of coefficients can reveal differences where none exist and conceal differences that do exist. This article explains the statistical and substantive implications of this assumption, introduces approaches to comparing coefficients that avoid making it, and uses simulations to explore the practical significance of the assumption and the power of approaches introduced to avoid it. As a practical example, I show that an apparent dramatic new insight into the technology strategy of Japanese computer manufacturers is actually just a manifestation of this problem. I close with implications for the practice of research.

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Paper provided by University of Illinois at Urbana-Champaign, College of Business in its series Working Papers with number 03-0100.

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Date of creation: Oct 2004
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Handle: RePEc:ecl:illbus:03-0100

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Web page: http://www.business.uiuc.edu/Working_Papers/Main.asp
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  1. Orme, Chris, 1995. "On the Use of Artificial Regressions in Certain Microeconometric Models," Econometric Theory, Cambridge University Press, vol. 11(02), pages 290-305, February. [Downloadable!]
  2. Yatchew, Adonis & Griliches, Zvi, 1985. "Specification Error in Probit Models," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 134-39, February. [Downloadable!] (restricted)
  3. Davidson, Russell & MacKinnon, James G., 1984. "Convenient specification tests for logit and probit models," Journal of Econometrics, Elsevier, vol. 25(3), pages 241-262, July. [Downloadable!] (restricted)
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  4. Kenneth E. Train, 1998. "Recreation Demand Models with Taste Differences over People," Land Economics, University of Wisconsin Press, vol. 74(2), pages 230-239. [Downloadable!] (restricted)
  5. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, March. [Downloadable!]
  6. Skeels, Christopher L. & Vella, Francis, 1999. "A Monte Carlo investigation of the sampling behavior of conditional moment tests in Tobit and Probit models," Journal of Econometrics, Elsevier, vol. 92(2), pages 275-294, October. [Downloadable!] (restricted)
  7. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July. [Downloadable!] (restricted)
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  1. Fowlie, Meredith, 2005. "Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement," 2005 Annual meeting, July 24-27, Providence, RI 19265, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Chen, Jie, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A discrete-time hazard analysis," Working Paper Series 2006:1, Uppsala University, Department of Economics. [Downloadable!]
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