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class5-642-08

# class5-642-08 - Econ 642 Monday April 7 class 5 Econ 642...

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Econ 642, Monday April 7, class 5 Econ 642, Monday April 7, class 5 Robert de Jong 1 1 Department of Economics Ohio State University Robert de Jong Econ 642, Monday April 7, class 5

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Econ 642, Monday April 7, class 5 Rest of Chapter 13 Chapter 14: fixed effects model Chapter 14: Random effects model Last Wednesday: first differencing Idea: y it = β 0 + δ 0 d 2 t + β 1 x it + a i + u it so Δ y i = δ 0 + β 1 Δ x i + Δ u i Formal analysis: we need Δ u i to be uncorrelated with Δ x i Note: 1 This is stronger than u it uncorrelated with x it 2 Follows if u it is uncorrelated with x is for t = 1 , 2 and s = 1 , 2 Robert de Jong Econ 642, Monday April 7, class 5
Econ 642, Monday April 7, class 5 Rest of Chapter 13 Chapter 14: fixed effects model Chapter 14: Random effects model Example 13.8: effect of enterprise zones on unemployment claims ez it is a dummy, equals 1 if an enterprise zone was present in city i in year t log ( uclms it ) = θ t + β 1 ez it + a i + u it a i is city-specific effect Since the enterprise zones were allocated based on city characteristics and needs, a i should be positively correlated with ez it So, we need to eliminate a i , by differencing: Δ log ( uclms it ) = α 0 + α 1 d 82 t + . . . + α 7 d 88 t + β 1 Δ ez it + Δ u it Robert de Jong Econ 642, Monday April 7, class 5

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Econ 642, Monday April 7, class 5 Rest of Chapter 13 Chapter 14: fixed effects model Chapter 14: Random effects model County crime rates in North Carolina crime rates for 1981-1987; prbarr is probability of arrest; prbconv is probability of conviction; prbpris is probability of serving time in prison (given a conviction); avgsen is average sentence; polpc is number of police officers per capita Equation (13.33) Robert de Jong Econ 642, Monday April 7, class 5
Econ 642, Monday April 7, class 5 Rest of Chapter 13 Chapter 14: fixed effects model Chapter 14: Random effects model Outline 1 Econ 642, Monday April 7, class 5 Rest of Chapter 13 Chapter 14: fixed effects model Chapter 14: Random effects model Robert de Jong Econ 642, Monday April 7, class 5

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