Interpreting interaction terms in linear and non-linear models: A cautionary tale

Abstract

Interaction terms are often misinterpreted in the empirical economics literature by assuming that the coefficient of interest represents unconditional marginal changes. I present the correct way to estimate conditional marginal changes in a series of non-linear models including (ordered) logit/probit regressions, censored and truncated regressions. The linear regression model is used as the benchmark case.interaction terms; ordered probit; ordered logit; truncated regression; censored regression; nonlinear models