exam_final_2012_solutions

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5 (a) [5 points] Explain why the OLS regression of TEST_AFTER on VIEWER yields an inconsistent estimate of the effect of the PBS program. Answer: the omitted variable could be the interest in the drug addiction topic. This omitted variable can be correlated with VIEWER and prior knowledge about the drug addiction and, therefore, with TEST_AFTER. (b) [5 points] Suppose, we want to get rid of the endogeneity in regression in a) by including more explanatory variables. Which of the variables (listed above) could correct the endogeneity in a)? That is, in the model TEST_AFTER = β0 + β1 VIEWER + β2* W2 + + βk* Wk + e, (1) what are W2, …, Wk that correlate with VIEWER and have direct effects on the test results? Explain. Answer: Given the answer in (a), we can possibly get rid of the endogeneity by including TEST_BEFORE. We may also want to control for personal characteristics by including variables that affect both the likelihood that the person will watch the PBS program (which will depend on curiosity, time availability etc.) and test scores: age and education, for example. (c) [5 points] Suppose, the method above does not completely remove the correlation between VIEWER and the error term. Explain how one could estimate model (1) above by the IV with the instrument GroupA. Describe the two steps of the 2SLS (IV). Answer: Since division into groups A and B is performed randomly, GroupA is uncorrelated with the error term. Since being informed about the PBS program, most probably, increased the chances to view the program, GroupA is correlated with VIEWER. Therefore, GroupA is a strong and valid instrument. 1 Step of IV: regress VIEWER on GroupA and all of the exogenous explanatory variables and instruments.

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