My daughter Sofia loves to play dress up. She loves to rummage in her closet and would sometimes come up with the weirdest combination of clothes. There was a day when she insisted on wearing a tiara with her dress and refused to be called anything but Princess Sofia. There was a time before she was a belly dancer/fairy princess/cowboy:
Playing dress up has numerous benefits for your kid:
1) It stimulates the kid's imagination. One moment they can pretend to be a princess, the next pretend to be a pirate. There are endless possibilities.
2) Your kid will be able to absorb more things about the world and people around her. When S was first hospitalized, she was so afraid of the doctors because of all the trauma she encountered in the ER. Her pedia suggested to buy her a toy doctor's kit. From then on, she looks forward to the nurses'/doctor's hourly visit. After they check on her temperature, heartbeat etc, she would do the same to them.
3) It improves their communication skills. Whenever my daughter plays dress up she would like to narrate what she's doing during her pretend play. I grab this opportunity to introduce to her new words. Amazingly, at 2 years 8 mos, my daughter has a wide vocabulary and speaks in complete sentences already.
To encourage your kid to do pretend play, make sure you have some costumes on hand. My daughter's Halloween costumes come in handy for these. I dump everything in box so anytime she'd want to play with those, she'll just get it from there.