Suppose You Are Interested in Explaining the Probability of Switching

Question

Examlex · Accepted Answer

The Answer is a)The model I would estimate is

Swi\widehat {tch ~J}obs _ { i } = \beta _ { 0 } + \beta _ { 1 } ext { Salary } _ { i } + \beta _ { 2 } ext { Experience } _ { i } + \beta _ { 3 } ext { Rent } _ { i } + \beta _ { 4 } ext { Children } _ { i }

where the dependent variable is a binary dummy variable that takes on the value 1 if the individual switched jobs and 0 if the individual did not switch jobs.
b)Yes,I could estimate the above model by OLS.Doing so would be referred to as estimating a linear probability model.The potential shortcoming of such a model is that it predicts values for the dependent variable that are less than 0 and greater than 1 when it is impossible for such values to exist.The primary challenge of using OLS to estimate models with a binary dependent variable is that OLS constrains the marginal effects between the independent variables and the dependent variable to be constant when the true effect is likely non-linear.
c)Yes.An alternative estimator that would be preferred to a linear probability model would be one that would constrain all estimates to fall between 0 and 1,and a model that would allow a nonlinear relationship between then independent and dependent variable,which we know is actually the case for binary dependent variables.

Suppose You Are Interested in Explaining the Probability of Switching

Definitions: