Does the inclusion of a product term in model estimation dramatically change the parameter estimates of the constituent variables?
Critics assert that increased levels of collinearity in models including a multiplicative term distort the beta coefficients. The beta coefficients in the multiplicative model often differ drastically from the additive model because the interactive model and additive model are describing different relationship. The additive model is describing a constant effect of the independent variable on the dependent variable. The interactive model describes the relationship as a conditional relationship, meaning the effects of each independent variable on the dependent variable varying according to the level of the other independent variable.
Related Questions
- Does the addition of a product term cause certain coefficients that are significant in an additive model to be non-significant in an interactive model?
- How does one obtain standard errors and t-ratios for the parameter estimates in an interactive model?
- What are the disadvantages of including a relevant product term to a model?
