Dealing with Qualitative

Response Regression Model

Niranjan Devkota, PhD
Coordinator
Research Management Cell

Date: September 8, 2020

 About the resource person
Dr. Devkota is an economist with the special focus on agriculture, climate
change and contemporary issues over a decade. He has received his PhD
degree from Tribhuvan University Nepal in August, 2018. He is now
working as coordinator of Research Management Cell at Quest
International College affiliated to Pokhara Univeristy, Nepal. Dr. Devkota
has attended UNESCAP, NDRC (China), SANDEE (ICIMOD), Hi-Aware
(ICIMOD), SANEM (Bangladesh) and many other high level training and
capacity building workshop on international co-operation, natural
resource management and trade related activities in home and abroad.
Dr. Devkota has been teaching economics, econometrics and research
methodology in MBA and BBA since 2012. He also has worked in
preparing strategic and implementation plans of several economic issues
of Government of Nepal as an economist. He has command over SPSS,
STATA, GIS and R programming.
 Contents
• Brief on qualitative response
• Dummy variable and its use in economics related
research
• Possible methods of dealing qualitative response
• Methodology for logistic regression
• Basic introduction of Logit, Probit and Tobit Model
• Estimation of models in STATA
• Feedback and discussion
•Lets  look at the regression equation:

Where,
Demand of Chicken (in KG)
= Price per KG (in NRs.)
= Age (in years)
= Gender ( Male or Female)
= Location (City or Rural)

From the independent variable, what is Gender and Location

Called?
It is called Dummy Variable
 What is Dummy Variable?
• Dummy variables are "proxy" variables or numeric
stand-ins for quantitative facts in a regression model.
• In regression analysis, the dependent variables may be
influenced not only by quantitative variables (income,
output, prices, etc.), but also by qualitative variables
(gender, religion, geographic region, etc.).
• A dummy variable has a value of 0 will cause that
variable's coefficient to have no role in influencing the
dependent variable, while when the dummy takes on a
value 1 its coefficient acts to alter the intercept.
Application of Dummy Variable
Dummy Independent Variable Dummy Dependent Variable
•   •  
Where, Where,
Demand of Chicken Gender ( Male or Female) =
= Price per KG (in NRs.) Price per KG (in NRs.)
= Age (in years) = Age (in years)
= Gender ( Male or Female) = Demand of Chicken
Is the application of dummy independent variable
similar with the application of dummy dependent
variable?
Answer: No

Dummy Independent Variable Dummy Dependent Variable

• When dummy variable act
as the independent variable
(or as explanatory variables)
they can be interpreted in
the same way as other
variables in OLS regression.
When dummy variable act as
dependent variable (also known as a
qualitative dependent variable) it
means that the dependent variable is
influenced by the explanatory
variables, which is qualitative in nature.
In such case OLS is not suitable. This
can be solve with the help of the Logit,
Probit and Tobit model.
Why dummy dependent variable matters
in economics related research
• Economics is a tough social science descipline.
• People are complicated — they have different (and
unstable) desires, react differently to events, and
view the world in different ways.
• Markets are complex interactions between millions
of these different people.
• Dealing with their interest/ preference requires to
know whether they like it or not?
• This type of study demands application of dummy
dependent variables.
What we are limiting in today’s session
• This session just highlight what is Logit, Probit and Tobit
Model
• It will focus more on the process how we deal with Logit,
Probit and Tobit model, rather than mathematical
estimations and theory behind it
• It outlines a methodology for logistic regression
• It will deal with practical research performed using logistic
analysis with three different dataset
• Provides dataset and do-files for further use
 Methodological Procedure for Qualitative
Response Regression Model
Step 1: Select research topic (mostly preferences/ determinants)
Step 2: set research objective
Step 3: Research design (plan your research for ex. explanatory)
Step 4: Identify suitable theory (Utility theory; Discrete choice model)
Step 5: Confirm your empirical model (Logit, Probit, Tobit)
Step 6: Set your research (hypothesis) (Null hypothesis H0)
Step 7: Develop a variable chart (list of variables use in your study)
 Methodological Procedure for Qualitative
Response Regression Model …
Step 8: Develop a questionnaire
Step 9: Collect data (follow sampling technique)
Step 10: Enter your data (in Excel, SPSS or other software)
Step 11:Arrange your data (as per your variable chart)
Step 12: Estimate the result (as per your plan)
Step 13: Pre-test and Post-test your data (confirm all is well)
Step 14: Run final regression model
Step 15: Interpret your result
 Logit/ Probit Model

See the video: https://

www.youtube.com/watch?v=1cFYlMj
Ez-c
 Logit Model
• In statistics, logistic regression, or logit regression, or logit
model is a regression model where the dependent variable
(DV) is categorical.
• If there are only two or binary dependent variables—that is,
where it can take only two values, such as pass/fail,
win/lose, alive/dead or healthy/sick it is called logistic
regression.

Or
ln(P(X|1)/P(X|0)) = a0 + a1X1 + a2X2 + … anXn
• It follows Cumulative Distribution Function (CDF) of the
standard normal distribution
• The binary logistic model is used to estimate the
probability of a binary response based on one or
more predictor (or independent) variables
(features).
• As such it is not a classification method. It could be
called a qualitative response/ discrete choice model
in the terminology of economics.
• Logistic regression measures the relationship
between the categorical dependent variable and
one or more independent variables by estimating
probabilities using a logistic function, which is the
cumulative logistic distribution.
 Probit Model
• In statistics, a Probit Model is a type of regression where
the dependent variable is categorical.
• The word is a portmanteau, coming from probability + unit.
• The purpose of the model is to estimate the probability
that an observation with particular characteristics will fall
into a specific one of the categories.
• As such it treats the same set of problems as does logistic
regression using similar techniques.
• It follows Cumulative Distribution Function (CDF) of the
standard normal distribution
Tobit Model
Tobit Model
•• The
  Tobit model is the extension of the Probit Model.
• Tobit Model is used when sample in which information on
the dependent variable is available only for some
observation.
• Such sample are called censored sample.
• Tobit Model is also known as Censored Regression Model/
and Linear Dependent Variable Regression Model.
• Tobit Model can be written as:
if RHS>0
=0
Where, RHS = Right hand side
Conceptualizing the formation of
dependent variables in Logit/
Probit/ Tobit Model
Concept of Logistic Regression Analysis

Suppose you want to study: Socio-economic influences

on small business performance in Nepal–India open border.
You set your objective as: to analyze perception of small
shop owners regarding the influence of open border to
their small business activities.
Then you set your hypothesis as: H01: There is no
relationship/association between open border and
the given explanatory variables.
 Logistic Regression Concept …
Dependent variable: Open border influences on small
business performance (yes or no)
Independent variables: Age, gender, experience, business
year, tax, … (No matter whether the variables are measures in any
scale)

Question: What you actually want to perform?

Answer: Perception of business owner
In such case estimation technique is: Logistic regression
(why??)
Lets see how Logit/ Probit Model works
Suppose
Dependent Variable:
Is open border associated with border area small scale
performance?
Yes
No
Independent Variables:
Respondents: age, Gender, education level, Income ….

In this example, when dependent variable is categorical (here

binary) we mostly use logit/ probit model.
Lets see how Tobit Model works
Suppose
Dependent Variable:
Are you fed up with load shedding problem in your home?
Yes No

If yes, are you ready to pay for adequate electricity?

Yes No

If yes, what additional rupees you are willing to pay for adequate electricity in your home?
Rs ………./ per unit (depended variable, why?)

Independent Variables:
Respondents: age, Gender, education level, Income ….

In this example, though dependent variable starts from the categorical cariable, it ends with
numeric value, in such case Tobit regression fruitful.
Application of Logit Model
 Example: Logit Model
Topic: Socio-economic influences on small business performance
in Nepal–India open border: Evidence from cross sectional analysis
Objective: to analyze perception of small shop owners regarding
the influence of open border to their small business activities in
Sunauli, Nepa/India border.
Research design: Explanatory research design
Population: The total population of this study bases on small
business owner residing the Nepal side of the open border area.
Sampling method: The study area selection is based on purposive
sampling
Sample: 372 shop owners
 Research hypothesis
This study tries to capture 4 different hypotheses to understand the
dimension of small shop owners’ perspectives regarding their
business performance in border area. They are:
– H01: There is no relationship/association between open border
and the given explanatory variables
– H02: There is no relationship/association between
blockade/border agitation and the given explanatory variables
– H03: There is no relationship/association between
communication access and the given explanatory variables
– H04: There is no relationship/association between homogeneity
in customs and costumes and the given explanatory variables
Developing variable chart
Pre-test and Post-test Analysis
Estimate the final result
Result Interpretation: Model 1
Result Interpretation: Model 2
Result Interpretation: Model 3
Result Interpretation: Model 4
Application of Probit Model
 Example: Probit Model
Topic: Bankers’ Perspectives on Green Practices in Commercial
Banks: Empirical Evidence from Nepal
Objective: to explore bankers’ general understanding and factors
affecting their perspective on green banking practices.
Research design: Explanatory research design
Population: The total population of this study is banking employee
engaged in ‘A grade’ commercial banks in Kathmandu valley.
Sampling method: The study area selection is based on purposive
sampling
Sample: 326 banking employees
 Research hypothesis
Following null hypotheses are to be tested against their alternative
hypotheses:
– H01: There is no significant relationship between green banking
awareness and given explanatory variables.
– H02: There is no significant association between bank’s clear
concept on green banking and given explanatory variables.
– H03: There is no significant association between readiness for
green banking and given explanatory variables.
– H04: There is no significant relationship between green
development policies in bank and given explanatory variables.
– H05: There is no significant association between regulation from
Nepal Rastra Bank (NRB) for green banking and given
explanatory variables.
Developing
variable
chart
Estimate the
final result
Result Interpretation: Model 1
Result Interpretation: Model 2
Result Interpretation: Model 3
Result Interpretation: Model 4
Result Interpretation: Model 5
Application of Tobit Model
 Example: Tobit Model
Topic: Estimation of the Willingness to Pay for Adequate Electricity
Supply in the Industries: Evidence from Industrial Estates of
Kathmandu Valley, Nepal
Objective: to explore industries willingness to pay for adequate
electricity supply in industrial estates of Kathmandu, Nepal.
Research design: Explanatory research design
Population: The total population of this study is industries located
in industrial estates of Kathmandu valley.
Sampling method: Census (means undertaken all the industries)
Sample: 279 industries
 Research hypothesis
As the objective of this study is to analyze willingness of industries to
pay for sufficient electricity supply using cross-sectional explanatory
design, the study hypothesizes that:
– H0: Industry is not willing to pay more for adequate electricity supply in the
industry.
Developing
variable
chart
Estimate the final result
Result Interpretation
Result Interpretation…
 Takeaway
• Dummy variable has important space in data analysis.
• Proxy selection in dummy variable must have some strong
logic.
• Interpretation of dummy independent variable is same as other
variable in linear regression analysis.
• When dependent variable is dummy, it follows logistic
regression analysis which is based on probability distribution
function.
• Logit and Probit regression are appropriate data analysis
technique to deal with when the dependent variable is dummy.
• Logit model is commonly used in social sciences as it has
unique features to provide odds ration.
• If the sample are censored, we use Tobit model.