Econometrics-I-13 - Econometrics I Professor William Greene...

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Part 13: Endogeneity Econometrics I Professor William Greene Stern School of Business Department of Economics
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Part 13: Endogeneity Econometrics I Part 13 - Endogeneity ™  1/61
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Part 13: Endogeneity Cornwell and Rupert Data Cornwell and Rupert Returns to Schooling Data, 595 Individuals, 7 Years Variables in the file are EXP  = work experience WKS  = weeks worked OCC  = occupation, 1 if blue collar,  IND  = 1 if manufacturing industry SOUTH  = 1 if resides in south SMSA = 1 if resides in a city (SMSA) MS  = 1 if married FEM  = 1 if female UNION  = 1 if wage set by union contract ED  = years of education BLK = 1 if individual is black LWAGE  = log of wage = dependent variable in regressions These data were analyzed in Cornwell, C. and Rupert, P., "Efficient Estimation with Panel  Data: An Empirical Comparison of Instrumental Variable Estimators," Journal of Applied  Econometrics, 3, 1988, pp. 149-155.  See Baltagi, page 122 for further analysis.  The data  were downloaded from the website for Baltagi's text.  ™  2/61
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Part 13: Endogeneity Specification: Quadratic Effect of Experience ™  3/61
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Part 13: Endogeneity The Effect of Education on LWAGE ™  4/61 = β + β + β + β + + 1 2 3 4 ...ε What is ε? ,... + everything el Abil se ity, Motivation Ability, Motivation = f( , , , ,...) LWAGE EDUC EXP EDUC GENDER SMSA SOUTH 2 EXP
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Part 13: Endogeneity What Influences LWAGE? ™  5/61 = β + β + β + β + + 1 2 3 4 Ability, Motivation Ability, Motivat ( , ,...) ... ε( ) Increased is associated with increases in ion Ability Ability, Motivati ( , , on LWAGE EDUC X EXP EDUC X 2 EXP β 2 ...) and ε( ) What looks like an effect due to increase in may be an increase in . The estimate of picks up the effect of and the hidden effect of . Ability, Motivation Ability Ability EDUC EDUC
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Part 13: Endogeneity An Exogenous Influence ™  6/61 = β + β + β + β + + 1 2 3 4 ( , , ,...) ... ε( ) Increased is asso Abili ciate ty, Motivation Ability, Motivation Ability, Motiva d with increases in ( , , , ti . n . o LWAGE EDU Z Z Z C X EXP EDUC X 2 EXP β 2 .) and not ε( ) An effect due to the effect of an increase on will only be an increase in . The estimate of picks up the effect of only. Ability, Motiv ation EDUC EDUC ED Z Z UC is an Instrumental Variable
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Part 13: Endogeneity Instrumental Variables p Structure n LWAGE ( ED,EXP,EXPSQ,WKS,OCC, SOUTH,SMSA,UNION ) n ED (… X MS , FEM , BLK ) n Reduced Form: LWAGE[ ED ( MS , FEM , BLK ), EXP,EXPSQ,WKS,OCC, SOUTH,SMSA,UNION ] ™  7/61
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Part 13: Endogeneity Two Stage Least Squares Strategy n Reduced Form: LWAGE[ ED ( MS , FEM , BLK ,X ), EXP,EXPSQ,WKS,OCC, SOUTH,SMSA,UNION ] p Strategy n (1) Purge ED of the influence of everything but MS, FEM, BLK (and the other variables). Predict ED using all exogenous information in the sample ( X and Z ).
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