ANCOVA model -Part I (Dummy Variables) - (Applied Econometrics)

 ■ Dummy Var (ANCOVA model)

Generally, in ANCOVA models the qualitative variables are only used as regressors. 

Even that those models are extensively used in Sociology, Paychology and Education, ANCOVA models are not quite common in Economics.

The mixture of the qualitative and quantitative variables is common in Economics i.e. explanatory variables as both qualitative and quantitative variables. Such models are known as the ANCOVA models.

□ Analysis of the Co Variance models

In the context of the regression, quantitative explanatory variables are known as co variance, so they are the ANCOVA models.

In ANCOVA models our aim is to asses whether there's a difference between the groups on the basis, say, race, cast, community keeping constant the effect of the quantitative regressors.

Few examples are cited:

ANCOVA is an extension of ANOVA models.

Say, 

Yi = aplha1 + alpha2 D2i + beta Xi + ui

        Where, say, Yi = Annual Salary

                              D2 = 1 = Male

                              D2 = 0 = Female

                              X = Teaching Experience                                             (yrs)

Now say we want to study whether there's the difference between salary of male and female teachers keeping constant, the teaching experience.

Now, assuming that the CLRM is satisfied and E (ui) = 0 the annual salary of a female person is; 

E (Yi/Xi, D2 = 0) = alpha 1 + beta Xi

E (Yi/Xi, D2 = 1) = (alpha1 + alpha2) + betaXi

The hypothese are: 

Ho: aplha2 = 0

Ha: alpha2 is not equal to 0

... keeping the years of teaching constant.

If alpha2 is significant, the null's rejected, then we'll say that there's a discrimination based on gender (sex).

To be contd...

Thank you 

Aditya Pokhrel

MBA, MA Economics, MPA