Dummy Variables in Panel data I am building a regression model on some panel data of sales and I am rather new to econometrics. I was thinking of introducing some indipendent variables built as Dummy1*Dummy2 . Is this new interplay variable acceptable or is it going to lead to some estimation errors in the model?
Yes, it is acceptable. Consider a Mincer wage equation. Let's define a dummy variable Female taking on the value one for females and the value zero for males and a dummy variable Married to equal one if a person is married and zero if otherwise. Then, you can estimate a model that allows for wage differences among four groups: married men, married women, single men, and single women. For this you need to interact the dummy variables, for instance Female*Married. But be cautious, you must select a base group to avoid the dummy trap.
A good reference is the chapter &quot;Multiple Regression Analysis with Qualitative Information: Binary (or Dummy) Variables&quot; (Chapter 7) in Wooldridge Introductory Econometrics.