Practice_midterm - ECO 120 Practice Problems for Midterm Fall 2007 1 This question is to get you a bit more comfortable with the idea of

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ECO 120 Practice Problems for Midterm Fall 2007 1. This question is to get you a bit more comfortable with the idea of instrumental variables. (a) Similar to the Thomas et al. (2006) paper that we studied in class, a researcher is interested in estimating the impact of iron supplements on labor supply. The researcher conducts a randomized evaluation in which a treatment group is given supplements but the control group is not. However, only 95% of the treatment group ends up taking the supplement (nobody in the control group takes the supplement), which means that comparing outcomes for those sampled for treatment to those sampled for the control group would end up counting the 5% of people that did not actually take the supplement. Assuming that the 5% of people that did not take the supplement did not bene&t at all, such an estimate (which is called the Intent- to-Treat estimate) will give a lower bound on the impact of the program. The researcher therefore proposes using an instrumental variables approach. He proposes using being sampled for treatment as an instrument for actually taking the drug. That is, the equation of interest is LS it = & 0 + 1 TS it + " it (1) where LS it is labor supply for individual i at time t and TS it is a dummy variable for whether that person took the drug ( " it is the error term). i. Why is regressing (1) directly likely to be a biased estimate? ii. The instrumental variables approach is to instrument TS it with S it , an indicator for whether the person was sampled to take the drug. That is, the relationship between taking the drug and being sampled for treatment is of the form TS it = ± 0 + ± 1 S it + u it (2) 1
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This note was uploaded on 05/04/2008 for the course ECON 120 taught by Professor Robinson during the Spring '08 term at University of California, Santa Cruz.

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Practice_midterm - ECO 120 Practice Problems for Midterm Fall 2007 1 This question is to get you a bit more comfortable with the idea of

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