Regression Models Depend on the type of Dependent Variables
Which regression model should you use that depends on the character of the dependent variable. In economics, the choice of regression model is driven by the specific nature of the economic decision or outcome being measured. Here are the same models: 1. Linear Regression Economic DV: Continuous, unbounded, often in logs (e.g., log wages, log prices). Example (Labor): Predicting an individual’s log hourly wage (USD) based on years of education, experience, and gender. Why linear? Wages are continuous and roughly normal after log transformation. Linear regression gives the familiar Mincer equation. 2. Tobit Regression Economic DV: Continuous but corner solution (many observations at a boundary, usually zero). Example (Consumer demand): Household expenditure on alcohol per month. Many households spend zero (abstainers), but among spenders, the amount is continuous. Why not linear? Linear would predict negative spending...