Why is the number of dummy variables to be entered into the regression model always equal to the number of groups (g) minus 1 (g−1)?
A) To avoid model misspecification
B) To increase the R-squared value
C) To avoid the situation of perfect multicollinearity
D) To control other variables in the model

Question

Quizplus · Accepted Answer

Including g dummy variables for g groups would lead to perfect multicollinearity, as the sum of all dummy variables would equal one, making one of them redundant. By using g-1 dummy variables, we avoid this issue and maintain a full rank matrix.

Why Is the Number of Dummy Variables to Be Entered