Defining and omitting a base group amongst a set of fixed effects is an attempt to remedy which identification challenge?
A) A control variable is correlated with the error term.
B) The treatment variable is correlated with the error term.
C) Perfect multicollinearity
D) Imperfect multicollinearity

Question

Quizplus · Accepted Answer

Perfect multicollinearity occurs when one variable in a regression model can be perfectly explained by a combination of other variables, including when dummy variables (fixed effects) for all categories of a categorical variable are included without omitting one category (base group). Omitting a base group avoids this issue by ensuring not all categories are perfectly collinear.

Defining and Omitting a Base Group Amongst a Set of Fixed