Dummy-encoding Inherently Collinear Variables
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This note is the result of trying to spell out what happens when we dummy-encode a set of variables which is known to be multicollinear at the outset. There seems to be a range of approaches in the literature, this is an attempt to collect the fundamental foot-work in a single note. We start out with a selfcontained presentation of the general treatment of exact multicollinearities, with estimable functions and estimation constraints on dummies. And provide an example at the end. Much of this has been discussed in the context of age-periodcohort analysis in various other places.
Project:Oppdragsgiver: Norges forskningsråd
Oppdragsgivers prosjektnr.: 187924
Frisch prosjekt: 4132 - Absenteeism in Norway - Causes, Censequences, and Policy Implications