In lieu of including a separate dummy variable for each different time period of a panel, often times the use of a simple time trend is chosen. This choice will lead to a(n):
A) increase in the r-squared.
B) increase in the adjusted r-squared.
C) increase in the number of parameters to be estimated.
D) decrease in the number of parameters to be estimated.

Question

Quizplus · Accepted Answer

By using a time trend instead of separate dummy variables for each different time period, we decrease the number of parameters to be estimated, which can improve the efficiency of our estimates and reduce multicollinearity issues.

In Lieu of Including a Separate Dummy Variable for Each