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SUGGESTED SOLUTIONS PRACTICE PROBLEMS
PAM 305
FALL 2006
13.3
We do not have repeated observations on the
same
crosssectional units in each time
period, and so it makes no sense to look for pairs to difference.
For example, in Example
13.1, it is very unlikely that the same woman appears in more than one year, as new
random samples are obtained in each year.
In Example 13.3, some houses may appear in
the sample for both 1978 and 1981, but the overlap is usually too small to do a true panel
data analysis.
13.5
No, we cannot include age as an explanatory variable in the original model.
Each
person in the panel data set is exactly two years older on January 31, 1992 than on
January 31, 1990.
This means that
∆
age
i
= 2 for all
i
.
But the equation we would
estimate is of the form
Δ
saving
i
=
δ
0
+
β
1
Δ
age
i
+
…
,
where
0
is the coefficient the year dummy for 1992 in the original model.
As we know,
when we have an intercept in the model we cannot include an explanatory variable that is
constant across i; this violates Assumption MLR.3.
Intuitively, since age changes by the
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 Fall '06
 LUCARELLI

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