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Columbia University

W3412

Fall 2015

Problem Set 4

Introduction to Econometrics

Profs. Seyhan Erden and Miikka Rokkanen

for all sections.

Part I.

True, False, Uncertain with Explanation:

(a) One can still use a linear regression framework even if the relation between a regressor and

the dependent variable is not linear.

(b) Including an interaction term between two independent variables, 1 and 2 , allows for the

measurement of the effect of a unit increase in 1 and 2, above and beyond the sum of the

individual effects of a unit increase in the two variables alone.

(c) To decide whether = 0 + 1 + or ln( ) = 0 + 1 + fits the data better,

you should examine the regression 2 .

Part II.

1. Consider the following multiple regression model:

Yi 0 1 X 1,i 2 X 2,i ui

(a) Suppose X 2,i X1,i 2 , Can you compute the OLS coefficient? Explain.

(b) Assume again that X 2,i 2 X 1,i Can you write a single variable model Yi 0 1 X1,i ui

which is equivalent to the multiple regression model above? Can you compute the OLS

coefficients of this single variable model? What is the intuition here?

(c) Consider the alternative model: Yi 1 X 1,i 2 X 2,i ui where again X 2,i X1,i 2 . Can you

compute the OLS coefficients in this model? Explain.

(d) Assume again X 2,i X1,i 2 . Can you write a single variable model: Yi 0 1 X 1,i ui

equivalent to the multiple regression model in (c)? Can you compute the OLS coefficients of

this single variable model? What is the intuition here?

2. Use Table 2 to answer the following questions. Table 2 presents the results of four

regressions, one in each column. Estimate the indicated regressions and fill in the values

(you may either handwrite or type the entries in; if you choose to type up the table, an

electronic copy of Table 2 in .doc format is available on the course Web site). For example,

to fill in column (2), estimate the regression with colGPA as the dependent variable and

hsGPA and skipped as the independent variables, using the robust option, and fill in the

estimated coefficients

(a) Fill out the table with necessary numbers, some will be on STATA output some you will

need to calculate yourself.

(b) Common sense predicts that your high school GPA (hsGPA) and the number of classes you

skipped (skipped) are determinants of your college GPA (colGPA). Use regression (2) to test

the hypothesis (at the 5% significance level) that the coefficients on these two economic

variables are all zero, against the alternative that at least one coefficient is nonzero.

(c) Find the F-statistic for regression (3) and explain what is it testing?

(d) Find the F-statistic for regression (4) and explain what is it testing?

(e) Are bgfriend (whether you have a boy/girlfriend) and campus (whether you live on campus)

jointly significant determinants of college GPA? Use regression (2) and (4) to test your

hypothesis. (i.e. use homoskedasticity-only F stat formula, eq.7.14 in the book, instead of

directly testing with STATA)

Table 1

Definitions of Variables in GPA4.dta (data is from Wooldridge textbook)

Variable

Definition

colGPA

Cumulative College Grade Point Average of a sample of 141

students at Michigan State University in 1994.

hsGPA

High School GPA of students.

skipped

Average number of classes skipped per week.

PC

= 1 if the students owns a personal computer

= 0 otherwise.

bgfriend

= 1 if the student answered yes to having a boy/girl friend

question

= 0 otherwise.

campus

= 1 if the student lives on campus.

= 0 otherwise.

Table 2

College GPA Results

Dependent variable: colGPA

Regressor

hsGPA

(1)

(2)

(3)

(4)

skipped

(

PC

__

bgfriend

__

__

campus

__

__

(

__

Intercept

F-statistics testing the hypothesis that the population coefficients on the indicated regressors are

all zero:

hsGPA, skipped

hsGPA, skipped, PC

__

__

__

bgfriend, campus

__

__

(

__

R2

R

Regression RMSE

n

coefficients, and p-values are given in parentheses under F- statistics. The F-statistics are

heteroskedasticity-robust.

professor characteristics for 463 courses for the academic years 2000-2002 at the University

of Texas at Austin. These data were provided by Professor Daniel Hamermesh of the

University of Texas at Austin and were used in his paper with Amy Parker, Beauty in the

Classroom: InstructorsPulchritude and Putative Pedagogical Productivity, Economics of

Education Review, August 2005, Vol. 24, No. 4, pp. 369-376.

Course_eval : Course overall teaching evaluation score, on a scale of 1 (very

unsatisfactory) to 5 (excellent)

Beauty: Rating of instructor physical appearance by a panel of six students, averaged across

the six panelists, shifted to have mean zero.

Female = 1 if the instructor is female, 0 if the instructor is male

Minority = 1 if the instructor is a non-White, 0 if the instructor is White

NNenglish = 1 if the instructor is not a native English speaker, 0 if the instructor is a native

English speaker

Intro= 1 if the course is introductory (mainly large Freshman and Sophomore courses), 0 if

the course is not introductory

Onecredit = 1 if the course is a single-credit elective (yoga, aerobics, dance, etc.), 0 otherwise

Age: Professors age

(a) Regress Course_eval on Beauty and female, test the hypothesis that all population

coefficients are jointly significant at 5% significance level.

(b) Regress Course_eval on Beauty, female, minority and age, test the hypothesis that all

population coefficients are jointly significant at 5% significance level.

(c) Now test if minority and age are jointly significant at 1% significance level using the results

from part (a) and part (b)

(d) Consider the various control variables in the data set. Which do you think should be included

in the regression? Using a table like table 3, examine the effect of Beauty on Course_eval.

(hint: Stata does not list adjusted 2 under robust option. The command to see adjusted 2 is

ereturn list r2_a)

Table 3

Teaching Ratings

Dependent variable: Course_eval

Regressor

(Standard Error

Below)

beauty

(1)

(2)

(3)

(4)

female

minority

__

nnenglish

__

intro

__

__

onecredit

__

__

age

__

__

__

__

__

__

intercept

following regressors are all zero: (p-value below)

beauty, female

(

beauty, female, minority

__

intro, onecredit

__

intro, age

__

beauty, female,

minority, nnenglish

minority, age

__

__

__

__

__

__

__

__

__

2

2

R

Regression RMSE

n

estimated coefficients, and p-values are given in parentheses under F- statistics. The Fstatistics are heteroskedasticity-robust.

4. Lawsch85 data set is collected by Kelly Barnett, an MSU economics student, for use in a

term project. The data come from two sources: The Official Guide to U.S. Law Schools,

1986, Law School Admission Services, and The Gourman Report: A Ranking of Graduate

and Professional Programs in American and International Universities, 1995, Washington,

D.C.

(a) Regress salary on north south east and west to analyze the effects of regions on salary of

Law School graduates. What is wrong with this regression? Why can you not do this?

(b) How would you correct the problem in part (a)?

(c) Interpret the coefficient of east under your correction strategy in part (b). .

5. Does the separation of corporate control from corporate ownership lead to inflated executive

salaries and worse firm performance? George Stigler and Claire Friedland have addressed

these questions empirically using a sample of firms.1 A subset of their data are in the file

execcomp.dta. The variables in the file are described in table 4

Variable

ecomp

assets

profits

mcontrol

Table 4

Definitions of Variables in execcomp.dta

Definition

Average total amount of compensation in thousands of dollars for

a firms top three executive.

Firms assets in millions of dollars.

Firms annual profits in millions of dollars.

A dummy variable indicating management control of the firm

= 1 management-controlled firms.

= 0 ownership-controlled firms.

(a) Regress executives compensation on the firms assets and profits, the control dummy, and

an intercept term. What proportion of the variation in top executives compensation in this

sample is accounted for by these variables?

(b) If the firms profit rise by one million dollars, by how much do you estimate the top

executives average compensation will change, if assets and the form of control remain

fixed?

(c) What is the estimated difference between the expected average compensations of top

executives in management-controlled firms and those in ownership-controlled firms, if

assets and profits remain fixed?

(d) Regress firm profits on firm assets and the management-control dummy. How much of the

variation in the firms profit in this sample can be accounted for by the variation in firms

asset and the form of control?

(e) Are the empirical results in (a) and (d) consistent with the claim that management control

hurts firm performance and leads to a higher pay for executives?

George J. Stigler and Claire Friedman, The Literature of Economics: The case of Berle and Means, Journal of Law

and Economics 26 no. 2 (June 1983): 237-268

6. Consider the following STATA output on college distances. This dataset contains data from a

random sample of high school seniors interviewed in 1980 and re-interviewed in 1986. In

this exercise you will use these data to investigate the relationship between the number of

completed years of education for young adults and the distance from each student's high

school to the nearest four-year college. The variable ed corresponds to years of education and

dist is the distance to the nearest college and it is measured in tens of miles (For example dist

= 3 means that the high school of the senior is 30 miles from the nearest college).

. reg ed dist, robust

Linear regression

Number of obs

F( 1, 3794)

Prob > F

R-squared

Root MSE

=

=

=

=

=

3796

29.83

0.0000

0.0074

1.8074

-----------------------------------------------------------------------------|

Robust

ed |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------dist | -.0733727

.0134334

-5.46

0.000

-.0997101

-.0470353

_cons |

13.95586

.0378112

369.09

0.000

13.88172

14.02999

------------------------------------------------------------------------------

(a) A students high school was 18 miles from the nearest college. Estimate the number of

years of schooling completed.

(b) Compute the 99% confidence interval for the difference in the predicted years of

education between a high school senior who is 93 miles to the nearest college and another

student who attends a high school that shares a campus with a college. Explain what your

solution means in one sentence.

(c) Does distance to the nearest college explain a lot of the variation in educational

attainment? Explain.

(d) Suppose distance was measured in kilometers such that 10 miles = 16 kilometers.

Replicate the entire STATA output.

(e) Interpret the coefficient of tuition below where the dependent variable, led, is the natural

logarithm of years of education. Give one good explanation for your answer. (note that

tuition is given in $1000)

Linear regression

Number of obs =

3796

F( 3, 3792) = 151.91

Prob > F

= 0.0000

R-squared

= 0.1001

Root MSE

= .12236

-----------------------------------------------------------------------------|

Robust

led |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------tuition |

.0158511

.0069175

2.29

0.022

.0022887

.0294135

momcoll |

.0474716

.0063938

7.42

0.000

.034936

.0600071

dadcoll |

.0749874

.0055234

13.58

0.000

.0641583

.0858164

_cons |

2.582142

.0065834

392.22

0.000

2.569234

2.595049

------------------------------------------------------------------------------

Following questions will not be graded, they are for you to practice and will be discussed at

the recitation:

7. SW Empirical Exercise 6.3

8. SW Exercise 7.1

9. SW Exercise 7.4

10. SW Empirical Exercises 7.1

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