# [R] Dummy variables model

Tobias Muhlhofer t.muhlhofer at lse.ac.uk
Mon Sep 5 21:11:09 CEST 2005

```Dang! That's awesome!!!!!

Being at the end of an empirical PhD in which all the econometrics was
done in R, I was already a longtime R enthusiast, but you never stop
learning more neat features!!!

YAY to everyone involved in R's development!!!!

Toby

Adaikalavan Ramasamy wrote:
> You will need to ensure that firm is a factor and not numerical (i.e.
> continuous). Here is an example
>
>
>  firm <- factor( sample(1:3, 20, replace=T) )
>  x1   <- runif(20)
>  y    <- rnorm(20)
>
>  summary( fit <- lm( y ~ -1 + x1 + firm ) )
>   ...
>   Coefficients:
>         Estimate Std. Error t value Pr(>|t|)
>   x1    -0.04964    0.74861  -0.066    0.948
>   firm1  0.10732    0.48269   0.222    0.827
>   firm2  0.27548    0.48781   0.565    0.580
>   firm3 -0.07651    0.53384  -0.143    0.888
>
> NB : The "-1" in the formula forces each firm to have its own intercept.
>
>
> Use model.matrix, you will see the dummy variables created within lm().
>
>  model.matrix( fit )
>            x1 firm1 firm2 firm3
>  1  0.6641647     0     1     0
>  2  0.5142712     1     0     0
>  3  0.2197956     1     0     0
>  4  0.3211675     0     1     0
>  5  0.1892449     1     0     0
>  6  0.7740754     0     0     1
>  7  0.3486932     0     1     0
>  8  0.2116816     0     0     1
>  9  0.2426825     0     1     0
>  10 0.2219768     1     0     0
>  11 0.9328514     1     0     0
>  12 0.7880405     0     0     1
>  13 0.8673492     0     1     0
>  14 0.1777998     0     1     0
>  15 0.3178498     1     0     0
>  16 0.3379726     0     0     1
>  17 0.9193359     1     0     0
>  18 0.6998152     0     1     0
>  19 0.2825702     0     0     1
>  20 0.6139586     1     0     0
>
> Regards, Adai
>
>
>
> On Mon, 2005-09-05 at 15:53 +0100, Tobias Muhlhofer wrote:
>
>>So are you guys saying to me that if I have variable firm which is the
>>factor of all firm identifiers, I could just go
>>
>>lm(y ~ x + firm)
>>
>>and that will implicitly include a dummy for each level of factor firm,
>>thus making this a fixed effects (aka LSDV) model?
>>
>>T
>>
>>
>>Jean Eid wrote:
>>
>>>You can turn the identity vector of the firms into a factor and do lm ....
>>>
>>>Jean
>>>
>>>On Mon, 5 Sep 2005, Tobias Muhlhofer wrote:
>>>
>>>
>>>
>>>>Hi, all!
>>>>
>>>>Anyone know an easy way to specify the following model.
>>>>
>>>>Panel dataset, with stock through time, by firm.
>>>>
>>>>I want to run a model of y on a bunch of explanatory variables, and one
>>>>dummy for each firm, which is 1 for observations that come from firm i,
>>>>and 0 everywhere else. I have over 200 firms (and a factor variable that
>>>> contains a firm identifier).
>>>>
>>>>Any easy way of going about this, without having to define all these
>>>>dummies? I checked lme() with random = ~ 1|firm, but the problem is that
>>>>these are random effects, i.e. that there are firm-by-firm disturbance
>>>>terms and overall disturbance terms, whereas I want just overall
>>>>disturbance terms. This is generally called a "fixed effects" model,
>>>>although it seems like the term "fixed effects" is being used somewhat
>>>>differently in the context of the nlme package.
>>>>
>>>>Toby
>>>>
>>>>--
>>>>**************************************************************************
>>>>When Thomas Edison invented the light bulb he tried over 2000
>>>>experiments before he got it to work. A young reporter asked
>>>>him how it felt to have failed so many times. He said
>>>>"I never failed once. I invented the light bulb.
>>>>It just happened to be a 2000-step process."
>>>>
>>>>______________________________________________
>>>>R-help at stat.math.ethz.ch mailing list
>>>>https://stat.ethz.ch/mailman/listinfo/r-help
>>>>PLEASE do read the posting guide! http://www.R-project.org/posting-guide.html
>>>>
>>>
>>>
>>>
>
>

--
**************************************************************************
When Thomas Edison invented the light bulb he tried over 2000
experiments before he got it to work. A young reporter asked
him how it felt to have failed so many times. He said
"I never failed once. I invented the light bulb.
It just happened to be a 2000-step process."

```

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