Interpreting interaction terms in linear and non-linear models: A cautionary tale
Interaction terms are often misinterpreted in the empirical economics literature by assuming that the coefficient of interest represents unconditional marginal changes. I present the correct way to estimate conditional marginal changes in a series of non-linear models including (ordered) logit/probit regressions, censored and truncated regressions. The linear regression model is used as the benchmark case.
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- Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
- William H. Greene, 2009.
"Testing Hypotheses About Interaction Terms in Nonlinear Models,"
09-08, New York University, Leonard N. Stern School of Business, Department of Economics.
- Greene, William, 2010. "Testing hypotheses about interaction terms in nonlinear models," Economics Letters, Elsevier, vol. 107(2), pages 291-296, May.
- Andreas C. Drichoutis & Rodolfo M. Nayga, 2011. "Marginal Changes in Random Parameters Ordered Response Models with Interaction Terms," Econometric Reviews, Taylor & Francis Journals, vol. 30(5), pages 565-576, October.
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