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Frondel, Manuel
Vance, Colin
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[Journal:] Applied Economics Letters [ISSN:] 1350-4851 (Print) [ISSN:] 1466-4291 (Online) [Volume:] 19 [Issue:] 10 [Pages:] 987-992
Interaction effects capture the impact of one explanatory variable x 1 on the marginal effect of another explanatory variable x 2. To explore interaction effects, the so-called interaction terms x 1 x 2 are typically included in estimation specifications. While in linear models the effect of a marginal change in the interaction term is equal to the interaction effect, this equality generally does not hold in nonlinear specifications (Ai and Norton, 2003). This article provides for a general derivation of marginal and interaction effects in both linear and nonlinear models and calculates the formulae of the marginal and interaction effects resulting from the Two-Part Model (2PM), a commonly employed censored regression model. Drawing on a survey of automobile use from Germany, we illustrate several subtleties inherent to the substantive interpretation of interaction effects gleaned from nonlinear models, such as the 2PM.
censored regression model
interaction terms
marginal and interaction effects
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