In the Fixed Effects regression model, you should exclude one of the binary variables for the entities when an intercept is present in the equation
A)because one of the entities is always excluded.
B)because there are already too many coefficients to estimate.
C)to allow for some changes between entities to take place.
D)to avoid perfect multicollinearity.

Question

Quizplus · Accepted Answer

Including all binary variables for the entities in a Fixed Effects regression model with an intercept will create perfect multicollinearity, since the sum of all binary variables for an entity will always equal 1. Therefore, one binary variable should be excluded to avoid this issue.

In the Fixed Effects Regression Model, You Should Exclude One