What are the advantages of including an interaction that is relevant to a model?
If an interaction exists in the data there are several advantages for including the multiplicative term. First, if an interaction does in fact exist and is not included in the estimation, this introduces a specification error in the form of omitted variable bias. Estimation of a model that fails to account for the interaction will not provide an accurate estimation of the true relationship between the dependent and independent variables. A model that includes the interaction term provides a better description of the relationship between the independent and dependent variables. Second, the inclusion of the product term will offer a more accurate estimation of the relationship and explain more of the variation in the dependent variable. Finally, including a product term according to Friedrich (1982) is a “low-risk strategy” in that if the product term is significant then keep it in the model otherwise one can drop the product term out of the model.
