Use the data in 401KSUBS.RAW for this exercise. The equation of interest is a linear probabilitymodel:pira=β0+β1p401k+β2inc+β3∈c2+β4age+β5age2+u
The goal is to test whether there is a tradeoff between participating in a 401(k) plan and having anindividual retirement account (IRA). Therefore, we want to estimate β1.
i.Estimate the equation by OLS and discuss the estimated effect of p401k.
ii.For the purposes of estimating the ceteris paribus tradeoff between participation in twodifferent types of retirement savings plans, what might be a problem with ordinary leastsquares?
iii.The variable e401k is a binary variable equal to one if a worker is eligible to participatein a 401(k) plan. Explain what is required for e401k to be a valid
IV for p401k. Do theseassumptions seem reasonable?
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