SCHOOL OF POSTGRADUATE

MASTER OF SCIENCE IN ECONOMICS

MODULE: ADVENCED ECONOMETRICS III

ASSIGNMENT: Multinomial Logit/Probit Model

GROUP 2
Names Reg No

TUREME Deo MSC/20/01/6254

URAYENEZA Germaine MSCE/20/01/6196

The Lecturer: Dr. KABANDA Richard

Done at Kigali, 12th December, 2021

 MULTINOMIAL PROBIT AND LOGIT MODELS

I. Multinomial Logit Model:

The multinomial logistic model assumes that data are case-specific; that is, each independent variable
has a single value for each case. The multinomial logistic model also assumes that the dependent
variable cannot be perfectly predicted from the independent variables for any case.

If the multinomial logit is used to model choices, it relies on the assumption of independence of
irrelevant alternatives , which is not always desirable. This assumption states that the odds of preferring
one class over another do not depend on the presence or absence of other "irrelevant" alternatives. For
example, the relative probabilities of taking a car or bus to work do not change if a bicycle is added as
an additional possibility. This allows the choice of K alternatives to be modeled as a set of K-1
independent binary choices, in which one alternative is chosen as a "pivot" and the other K-1 compared
against it, one at a time.

II. Multinomial Probit Model:

The multinomial probit model is similar to multinomial logit model, just like the binary probit model is
similar to the binary logit model. The difference is that it uses the standard normal cdf.
In statistics and econometrics, the multinomial probit model is a generalization of the probit
model used when there are several possible categories that the dependent variable can fall into.
The multinomial probit model is a statistical model that can be used to predict the likely outcome of an
unobserved multi-way trial given the associated explanatory variables. In the process, the model
attempts to explain the relative effect of differing explanatory variables on the different outcomes.
 Exemple of multinomial logit:
If outcome or dependent variable is categorical without any particular order, we can use multinomial
logit. examples:
 If elections were held today, for which party would you vote?:
1: Democrats, 2: Independent, 3: Republicans
 What do you like to do on the weekends?
1: Rest, 2: Go to movies, 3: Exercise
 III. Practical example for Multinomial Logit/Probit model

Entering high school students make program choices among general program, vocational
program and academic program. Their choice might be modeled using their writing score
and their social economic status.
The data set contains variables on 200 students. The outcome variable is prog, program
type. The predictor variables are social economic status (ses) a three-level categorical
variable and writing score, write, a continuous variable.
III.a. Interpretation of the data
 In the output above, The log likelihood (-179.98173) can be used in comparisons of
nested models.
 The likelihood ratio chi-square of 48.23 with a p-value < 0.0001 show that the
model as a whole fits significantly better than an empty model (i.e., a model with
no predictors)
 The output above has two parts, labeled with the categories of the outcome
variable prog. They correspond to the two equations below:
where b’s are the regression coefficients.

 A one-unit increase in the variable write is associated with a 0.058 decrease in the relative log
odds of being in general program vs. academic program.
 A one-unit increase in the variable write is associated with a 0.1136 decrease in the relative log
odds of being in vocation program vs. academic program.
 The relative log odds of being in general program vs. in academic program will decrease by
1.163 if moving from the lowest level of ses (ses==1) to the highest level of ses (ses==3).

REFERENCE

- Multinomial Logit, https://en.wikipedia.org/wiki/Multinomial_logistic_regression

- Multinomial Logit/Probit, https://cran.r-project.org/web/packages/mlogit/vignettes/e4mprobit.html

- Multinomial Probit, https://en.wikipedia.org/wiki/Multinomial_probit

- https://stats.idre.ucla.edu/stata/dae/multinomiallogistic-regression/

- William H. Greene, July 10, 2002, Econometric Analysis, New York University.