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klem_guide_070215 - Estimating Equations in Excel EEP 162...

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Estimating Equations in Excel EEP 162: Water Resource Economics 1 Steps in Estimating Demand Curves 1. Economic Theory (a) Model: Need framework for estimating demand for inputs. i. What is the question you are trying to address? What is the story you want to tell. Data analysis is only a tool to help tell your story. Economic theory is the vocabulary for telling the story. ii. What do you assume about firm behavior and preferences? Assume a functional form for their production, such as Cobb- Douglas or CES. Use profit maximization or cost minimiza- tion to obtain input demand functions. (b) What variables are important? (c) Use theory to guide your data collection and data analysis. You may not be able to do exactly what theory prescribes. 2. Data (a) Obtain data: Find data for the variables you need based on the- oretical framework. Decide whether you need time series or cross section-sometimes you don’t have a choice. (b) Become familiar with your data. i. Compute summary statistics. ii. Check for outliers or missing data. 1
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iii. Check if the outliers or missing data are random. (c) Select a functional form for your regression based on: i. Economic theory: What does your theory say about the rela- tionship between variables? ii. Statistical theory: What does your data say about the rela- tionship between the variables? (d) Manipulating data: Data available may not be exactly the data you need in the theoretical model. You may need to rescale or transform data to fit your model. i. Use available data as proxies. Justify why data are good prox- ies. For example, suppose you would like to estimate demand for outdoor residential water but data are not available for outdoor residential water use. Do you give up? You can use available data as a proxy for outdoor water use, such as size of landscape, time of use (both during the day and during the year).
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