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6)Seogang university management accounting12

# 6)Seogang university management accounting12 - N7 Zoning...

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N7. Zoning But first a digression on causality and instruments and then go back to finish N6, Glaeser and Kahn. Consider an model of the demand for orange juice ln Q D = a D + b D ln P + ε D Suppose regress ln Q on ln P . What is the problem? –Endogeneity. Equilibrium price and quantity are determined by supply and demand. ln Q S = a S + b S ln P + ε S

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–So ln P is positively correlated with demand shock ε D . Will bias estimate of b D downward. Solution. Find an instrument. Something correlated with ln P but not ε D . What is a great instrument here? Can run two-stage least squares: regress ln P on instrument. Then regress ln Q on fitted value of ln P (i.e. the value on the regression line from stage 1.)
What make weather in Florida such a great instrument? –Highly correlated with ln P –Not correlated with demand shock. Freezing weather in Florida doesn’t mean the people will want to drink more orange juice. Other example of an instrument –Question: does unionism have geographic spillovers –Coal mines as an instrument Now look at Glaser and Kahn ln D = β 0 + β 1 Cars + ε

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