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ps6_ans

# ps6_ans - Department of Economics University of California...

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Department of Economics Spring 2006 University of California Prof. Woroch Economics 140 : Problem Set 6 Answer Sheet I. For each, decide whether you agree or disagree with part or all of the statement and explain the reasoning behind your answer in a couple short paragraphs . Note that you may agree with part of the statement, but disagree with the rest. 1. When a linear equation involves a single endogenous explanatory variable, as long as it is correlated with each of several instruments, TSLS estimation will produce consistent estimates provided that the predicted values for the endogenous variable and the exogenous variables are not multicollinear. Answer : Disagree. The mentioned conditions are necessary for the TSLS estimator to be consistent, but it is also necessary that all the instruments used in the first stage equation are uncorrelated with the error term in the structural equation. Only exogenous instruments will identify exogenous variation in the endogenous explanatory variable. If this additional condition holds as well, then the TSLS estimator is consistent. 2. The reduced-form equation for an endogenous variable expresses an endogenous variable as a function of all the instruments, while the structural equation may have endogenous variables on both sides of the equation. Answer : Agree. In the reduced form equation we are trying to find exogenous variation in an endogenous variable, so we regress the endogenous variables on the exogenous variables only. Thus we include both the instrumental variables and the exogenous variables included in the structural equation as explanatory variables in the reduced form. A structural equation may include endogenous explanatory variables, but if it does then we need to use the TSLS estimator as the OLS estimators of the structural equation will be inconsistent. 3. One “internal” threat to a controlled experiment is the so-called Hawthorne effect, while one “external” threat is the occurrence of sample attrition over the course of the experimental period. Answer : Disagree. Both the Hawthorne effect and sample attrition threaten internal validity as both can lead to an inconsistent estimator of the treatment effect for the population studied (i.e., the population from which the sample is drawn). As the Hawthorne effect implies that subject’s behavior is influenced by being in an experiment, the estimator may be consistent for the treatment effect in an experimental setting but it will be an inconsistent estimator for treatment effect on the population studied in a natural setting. When there is sample attrition, the sample may no longer be representative of the population studied causing an estimator based on the select sample to be an inconsistent estimator of the treatment effect for the population the experimenter intended to study.

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Econ 140-Spring 2006 2 PS6 Answers II. MULTI-PART QUESTIONS : Answer each of the following 3 questions. The second one requires the use of the Excel dataset that is posted to the website.
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ps6_ans - Department of Economics University of California...

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