Consider a large state that is divided into smaller geographic areas called counties. For the purposes of analysis this large state can also be divided into 3 regions (Region 1, Region 2, and Region 3). Consider the following econometric model for the crime rate (crimes committed per person) in county i in time period t in a large state divided into three smaller regions: ln crmte it=β0+β1lnprbarrit+β2lnprbconvit+β3lnprbprisit+β4lnavgsenit+β5lnpolpcit+β6lnwmfgit+β7region1i+β8regioni+β9urbani+εit where lnX denotes the natural logarithm of variable X and: prbarr = probaility of arrest in county i in time t prbconv = probability of conviction in county i in time t prbpris = probability of prison senstence in county i in time t avgsen = average prison sentence in days in county i in time t polpc = police per capita in county i in time t wmf g= average weekly wage, manufacturing industry, in county i in time t region 1=1 if county i is located in region 1,0 otherwise region 2=1 if county i is located in region 2,0 otherwise urban =1 if county i is located in an urban area, 0 otherwise Note that region3 is the omitted region.
