Least absolute deviations estimation is an alternative to OLS that is less sensitive to
outliers and that delivers consistent estimates of conditional median parameters.
332
Part 1
Regression Analysis with CrossSectional Data
K E Y T E R M S
Attenuation Bias
Average Partial Effect (APE)
Classical ErrorsinVariables
(CEV)
Conditional Median
DavidsonMacKinnon Test
Endogenous Explanatory
Variable
Endogenous Sample Selection
Exogenous Sample Selection
Functional Form
Misspecification
Influential Observations
Lagged Dependent
Variable
Least Absolute Deviations
(LAD)
Measurement Error
Missing Data
Multiplicative Measurement
Error
Nonnested Models
Nonrandom Sample
Outliers
PlugIn Solution to the
Omitted Variables Problem
Proxy Variable
Random Coefficient (Slope)
Model
Regression Specification Error
Test (RESET)
Stratified Sampling
Studentized Residuals
P R O B L E M S
9.1
In Problem 4.11, the
R
squared from estimating the model
log(
salary
)
0
1
log(
sales
)
2
log(
mktval
)
3
profmarg
4
ceoten
5
comten
u
,
using the data in CEOSAL2.RAW, was
R
2
.353 (
n
177). When
ceoten
2
and
comten
2
are added,
R
2
.375. Is there evidence of functional form misspecification in
this model?
9.2
Let us modify Computer Exercise C8.4 by using voting outcomes in 1990 for incumbents
who were elected in 1988. Candidate A was elected in 1988 and was seeking reelection
in 1990;
voteA90
is Candidate A’s share of the twoparty vote in 1990. The 1988 voting
share of Candidate A is used as a proxy variable for quality of the candidate. All other
variables are for the 1990 election. The following equations were estimated, using the
data in VOTE2.RAW:
2
voteA90
75.71
.312
prtystrA
4.93
democA
(9.25)
(.046)
(1.01)
.929 log(
expendA
)
1.950 log(
expendB
)
(.684)
(.281)
n
186,
R
2
.495,

R
2
.483,
and
2
voteA90
70.81
.282
prtystrA
4.52
democA
(10.01)
(.052)
(1.06)
.839 log(
expendA
)
1.846 log(
expendB
)
.067
voteA88
(.687)
(.292)
(.053)
n
186,
R
2
.499,

R
2
.485.
(i) Interpret the coefficient on voteA88 and discuss its statistical significance.(ii) Does adding voteA88 have much effect on the other coefficients?
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 Fall '14
 Econometrics, Regression Analysis, OLS, functional form, measurement error