Advanced Econometrics

(02-BWL:MSc-St-1; 02-VWL:MSc-St-1; 02-VWL:BSc-St-4)

WS 2015/16
Prof. Dr. Peter Winker
 Some References
• Baltagi (2005): Econometric Analysis of Panel Data, Wiley (3. Ed.) BT
• Cameron, Trivedi (2005): Microeonometrics, Cambridge Univ. Press CT
• Greene (2012): Econometric Analysis, Prentice-Hall (7. Ed.) GR
• Heij et al. (2004): Econometric Methods with Applications
in Business and Economics, Oxford University Press HB
• Johnston, DiNardo (1997): Econometric Methods, McGraw-Hill (4. Ed.)
JD
• Ruud (2000): Classical Econometric Theory, Oxford Univ. Press RU
• Winkelmann, Boes (2006): Analysis of Microdata, Springer WB
• Wooldridge (2008): Introductory Econometrics, South-Western WO
• Further literature (including journal articles) might be provided during the
course
31.08.2015 © Peter Winker 2015 1.1 - 2
 Econometrics in MSc.
• Adanced Econometrics (this course)
• Zeitreihenökonometrie und
computergestützte Verfahren (in German)
• Seminar (English and/or German)

31.08.2015 © Peter Winker 2015 1.1 - 3

 General Outline of Content
• Advanced Econometrics:
– General methods for estimation, specficiation
testing and hypothesis testing
– Specific methods for disaggregate (micro)
data: cross-section (N), panel data for
individuals/firms (T < N)
• Zeitreihenökonometrie…:
– Aggregate (macro) data: time series (T),
panel data for countries/regions (T > N)
31.08.2015 © Peter Winker 2015 1.1 - 4
 Typical Research Questions
• What are the returns to education?
– Wage rates
– Employment probability
– Non-monetary returns
• How to measure gender discrimination on
the labour market
• What are the determinants of firm survival
31.08.2015 © Peter Winker 2015 1.1 - 5
 Syllabus I

1. Aspects of (micro)econometric analyses

• The role of econometrics
• What is special about microeconomic data?
2. Estimation methods
• Linear models: OLS
• Nonlinear models: NLS
• GLS and instrumental variables
• Maximum likelihood
• GMM

31.08.2015 © Peter Winker 2015 1.1 - 6

 Syllabus II

3. Tests and model selection

• Tests of hypotheses
• Specification testing
• Model selection
4. Models for panel data
• Introduction and pooled estimation
• Fixed and random effects estimator
• Dynamic panel data models

31.08.2015 © Peter Winker 2015 1.1 - 7

 Syllabus III

5. Models for discrete and limited dependent variables

• Linear probability model, Probit, Logit etc.
• Tobit and Heckit

31.08.2015 © Peter Winker 2015 1.1 - 8

 Life Feedback
• Is the lecturer proceeding too fast, too
slow, just right?
• Did I grasp major concepts and can apply
them to specific settings?
• Do I want to know more?

• You can provide all type of feedback and

ask all questions at any time!
31.08.2015 © Peter Winker 2015 1.1 - 9
 1. Aspects of
(micro)econometric analyses

Advanced Econometrics – WS 2015/16

 1.1. The Role of Econometrics

Advanced Econometrics – WS 2015/16

 Introduction

Advanced Econometrics – WS 2015/16

 Economics and Econometrics

Real
Abstraction „Theory“
Phaenomena

Evaluation Econometrics Deduction

Implications for
real phaenomena
Interpretation Conclusions

31.08.2015 © Peter Winker 2015 1.1 - 13

 Main Goals
• Quantification of economic relationships
(elasticities, marginal effects etc.)
⇒ Estimation

• Test of economic hypothesis

(existence of relationships, expected
values of parameters)
⇒ Hypothesis testing, model selection
31.08.2015 © Peter Winker 2015 1.1 - 14
 Prerequisites
• Economic theory
(causality vs. correlation, identification)
• Data (quality, sample selection etc.)
• Statistical hypothesis testing assumes
specific properties of the model
⇒ Specification testing

31.08.2015 © Peter Winker 2015 1.1 - 15

 Types of Data

Data

Aggregate level Disaggregate

(countries, level
regions) (microdata)

Quantitative
Time series Cross section Qualitative

Single
Panel
cross section

31.08.2015 © Peter Winker 2015 1.1 - 16

Example

A First Application
• What determines spending for housing?
• A full economic model would comprise
– distribution of income on all consumption
goods
– intertemporal allocation of income and wealth
– family planing
– decisions about job related mobility
–…

31.08.2015 © Peter Winker 2015 1.1 - 17

Different Modelling Approaches
• Structural: Model is derived from theory
including strong assumptions ⇒ structural
(fundamental) parameters are estimated
• Reduced form: Not all causal relationships
are covered explicitly, estimated parameters
are functions of structural parameters

• Paneldata (allow to control for heterogeneity)

• Dynamic models
31.08.2015 © Peter Winker 2015 1.1 - 18
Calculus

Definition: Structure
• A structure consists of
– a set of variables W = [Y X]
– a joint probability distribution F(W)
– some a priori ordering of the elements of W
with regard to causal dependence
– a priori restrictions of the model
– a functional form for the relationship and for
the parameter restrictions

31.08.2015 © Peter Winker 2015 1.1 - 19

Calculus

Structural Model
• To be explained: (vector valued) variable y
• Structural model: For all observations i
g(yi,zi,ui | θ) = 0
structural
explanatory random parameters
variables error terms

• If there is a unique solution for each yi:

reduced form
yi = f(zi,ui | π) where π = h(θ)
parameter vector of
31.08.2015 © Peter Winker 2015
the reduced form 1.1 - 20
Example

Structural Model

Ct = β 0 + β1Yt + β 2 rt + ε C ,t
It = γ 0 + γ 1rt + ε I ,t
Yt = Ct + I t + Gt
• Parameter vector:
(
θ = β 0 , β1 , β 2 , σ ε C , γ 0 , γ 1 , σ ε I )
31.08.2015 © Peter Winker 2015 1.1 - 21
Example

Reduced Form
Ct = α C1 + α C 2Gt + α C 3 rt +ν C ,t
It = α I 1 + α I 2Gt + α I 3 rt +ν I ,t
Yt = α Y 1 + α Y 2Gt + α Y 3 rt +ν Y ,t
• Where, e.g.,
β0 + β1γ 0 β1 β1γ1 + β2
=
α C1 , α
= , α
=
1 − β1 1 − β1 1 − β1
C2 C3

31.08.2015 © Peter Winker 2015 1.1 - 22

 Selection for Applications
• Inference on structural parameters θ
⇒ estimate structural model
• Sometimes indirect approach feasible for
π = h(θ)
• If interest is in conditional forecasts of y,
in specific situations estimation of π
(often simpler than for θ) is sufficient

31.08.2015 © Peter Winker 2015 1.1 - 23

Example

Rents I
• A reduced form linear approximation:
renti = β0 + β1wagei + β2 childreni + … + εi
• Interpretation of the coefficients, e.g. β1?
• Measurement of the parameters
⇒ estimation
here: standard OLS (see chapter 2)

31.08.2015 © Peter Winker 2015 1.1 - 24

 Example C: regression constant
WAGE_M: monthly gross wage income

AGE:
Rents II
NO_CHILDREN: number of children in househols
age in years
REGION: living in East Germany: 0 – no, 1 – yes
SMOKING: smoking: 0- no, 1 - yes

Dependent Variable: RENT

Method: Least Squares
Sample (adjusted): 2 19642
Included observations: 1406 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 489.2048 21.18743 23.08938 0.0000

WAGE_M 0.058505 0.004782 12.23456 0.0000
NO_CHILD 24.40309 5.275915 4.625376 0.0000
AGE -1.130341 0.499549 -2.262723 0.0238
REGION -59.25345 12.08374 -4.903570 0.0000
SMOKING -35.52435 10.52796 -3.374286 0.0008

R-squared 0.125963 Mean dependent var 540.0512

Data: GSOEP, wave 2012, paying rent, monthly wage between 500 and 5000€
31.08.2015 © Peter Winker 2015 1.1 - 25
rent1.tab
 Example

Rents III
Increase of wage by 1 Euro increases
Dependent Variable: RENT ceteris paribus (c.p.) rent payment by
Method: Least Squares about 0.06 Euro
Sample (adjusted): 2 19642
Included observations: 1406 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 489.2048 21.18743 23.08938 0.0000

WAGE_M 0.058505 0.004782 12.23456 0.0000
NO_CHILD 24.40309 5.275915 4.625376 0.0000
AGE -1.130341 0.499549 -2.262723 0.0238
REGION -59.25345 12.08374 -4.903570 0.0000
SMOKING -35.52435 10.52796 -3.374286 0.0008

R-squared 0.125963 Mean dependent var 540.0512

Being a smoker instead of a non-smoker

reduces rent c.p. by about -35.52 Euro
31.08.2015 © Peter Winker 2015 1.1 - 26
rent1.tab
Example

Rents IV
• Potential issues with these estimates:
– many relevant factors are missing ⇒
confounding
– we assume that the model is in fact
(at least an approximation to)
a reduced form of the full structural model
– we have a specific selection of households
(e.g., those actually paying rents!)
–…
31.08.2015 © Peter Winker 2015 1.1 - 27
 Example

Rents V
Higher wage decreases c.p.
Dependent Variable: DRENT probability of paying rent
Method: Least Squares
Sample: 1 19644 IF WAGE_M>0
Included observations: 4754

Variable Coefficient Std. Error t-Statistic Prob.

C 0.596685 0.016520 36.11867 0.0000

WAGE_M -1.41E-05 5.89E-06 -2.390076 0.0169
NO_CHILD -0.073768 0.006301 -11.70820 0.0000

• DRENT is a binary variable which takes on the value 1

for those paying rents
• Econometric issues regarding such qualitative
dependent variables will be discussed in chapter 5
31.08.2015 © Peter Winker 2015 1.1 - 28
rent2.tab
 References

• CT:1-2
• WB: 1

31.08.2015 © Peter Winker 2015 1.1 - 29

 1.1. End

Advanced Econometrics – WS 2015/16

 Advanced Econometrics
(02-BWL:MSc-St-1; 02-VWL:MSc-St-1; 02-VWL:BSc-St-4)

WS 2015/1
Prof. Dr. Peter Winker
 1.2. Microeconomic Data

Advanced Econometrics – WS 2015/16

 Sources of Microdata
• Observations
– Official statistics: Microcensus, IAB
– Surveys from research institutions:
GSOEP, ZEW-Financial Market Survey
– Own surveys
(Reference on design of questionaires when planing
your own survey: Rolf Porst: Fragebogen – Ein Arbeitsbuch,
VfS, Wiesbaden 2011 (3th Ed.))

• Experiments in Economics

31.08.2015 © Peter Winker 2015 1.2 - 3

 Types of Microdata

Microdata

Quantitative
Qualitative
(discrete or
(discrete)
continuous)

unlimited limited binary multinomial ordered

limited
duration or
dependent
count data
variables

31.08.2015 © Peter Winker 2015 1.2 - 4

 Issues with Microdata
Possibly closer link between (micro-) economic
theory and data; but:
1.Sampling and non sampling errors
2.Nonlinear models
3.Distributional assumptions
4.Unobserved/unobservable heterogeneity and
confounding
5.Correlation and causality
…and often several issues at the same time!
31.08.2015 © Peter Winker 2015 1.2 - 5
1. Sampling and Non Sampling Errors
• Sampling errors:
– Interviewing wrong respondents
– Non representative sample
⇒ biased sample
– Non random unit non response
• Non sampling „errors“:
– Misunderstanding of questions
– Non random item non response
– Faking interviews
–…
31.08.2015 © Peter Winker 2015 1.2 - 6
 Biased Samples
• Exogenous sampling: based on
exogenous variable (like gender)
• Sampling based on answers: dependent
on invidiual decisions (only students
attending class evaluate class)
• Bias due to censoring, e.g. duration of
unemployment until specific date

31.08.2015 © Peter Winker 2015 1.2 - 7

 Example
Answer Based Sampling
(GSOEP 2012)
.00040
wage (all)
.00035 wage (full time employed)
.00030

.00025
Wage distribution differs when
Density

.00020 considering all or only full time

.00015 employed persons

.00010

.00005

.00000
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

31.08.2015 © Peter Winker 2015 1.2 - 8

wages1.emf
 Example
Answer Based Sampling
(GSOEP 2012)

.0004 .0005
wage women (all) wage women (fulltime)
wage men (all) wage men (fulltimel)
.0004
.0003

.0003
Density

Density
.0002

.0002

.0001
.0001

.0000 .0000
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Sampling effect might differ for subgroups of the population

⇒ risk of misleading conclusions

31.08.2015 © Peter Winker 2015 1.2 - 9

wages2.emf
wages3.emf
 2. Nonlinear Models
Micromodels often result in nonlinear
relationships, e.g.:
• Discrete dependent variables
(e.g. unemployment rate
in the aggreate, but 0/1
for individuals)
• „Holes, kinks and edges“
(e.g. labour supply function)

© Peter Winker 2015 1.2 - 10

31.08.2015
 3. Distributional Assumptions
• Aggregate data: central limit theorems
⇒ support of normal distribution for
means, coefficients and error terms
• Disaggregate data: central limit theorems
do not necessarily apply
⇒ distributions might be non normal!
⇒ relevance for ML estimation (2.4) and
specification testing (3.2)
31.08.2015 © Peter Winker 2015 1.2 - 11
 4. Unobserved/Unobservable
Heterogeneity and Confounding
• Relationships at micro level depend on
individual specific characteristics
• Unobserved heterogeneity:
e.g. wage depends on schooling degree
(observed), but also on grades (typically
unobserved)
• Unobservable heterogeneity:
e.g. wage also depends on motivation for
specific work (unobservable)
31.08.2015 © Peter Winker 2015 1.2 - 12
 Heterogeneity and „Confounding“
• Individual heterogeneity is often „explained“ only
to a small extent by the model
• Unobserved (unobservable) heterogeneity might
affect outcome
• If unobserved heterogeneity and some
observed characteristics are correlated, the
effect of unobserved factors might be
confounded with the effect of the observed
variable
31.08.2015 © Peter Winker 2015 1.2 - 13
Example

Confounding in Wage Equation

• Income is found to depend on gender
• There are other sources of heterogeneity with
regard to income, e.g. working time
• If working time is not controlled for (e.g. because
it has not been observed), its effect might be
confounded with the effect of gender (since
working time is correlated with gender)

31.08.2015 © Peter Winker 2015 1.2 - 14

Example

Confounding in Wage Equation

Dependent Variable: WAGE_M

Method: Least Squares
Sample: 1 19644 IF EMPLOYED
Included observations: 7742

Variable Coefficient Std. Error t-Statistic

C 3269.098 27.67156 118.1393

SEX -1221.986 39.53903 -30.90582

WAGE_M: monthly gross wage income (2012)

C: regression constant
SEX: Dummy variable with 0 – man, 1 - woman

31.08.2015 © Peter Winker 2015 1.2 - 15

Example

Confounding in Wage Equation

Dependent Variable: WAGE_M

Method: Least Squares
Sample: 1 19644 IF EMPLOYED
Included observations:
Dependent 7742 WAGE_M
Variable:
Method: Least Squares
Variable1 19644 IF EMPLOYED
Sample: Coefficient Std. Error t-Statistic
Included observations: 7742
C 3269.098 27.67156 118.1393
SEX Variable -1221.986
Coefficient39.53903 -30.90582
Std. Error t-Statistic

C 2107.564 55.12401 38.23314

SEX -721.3175 43.43658 -16.60622
FULLTIME 1214.736 50.44019 24.08271

31.08.2015 © Peter Winker 2015 1.2 - 16

 5. Correlation and Causality
• Without further assumptions, econometric
methods result in estimates of conditional
correlation
• Correlation does not imply causality!
• A sufficient condition would be exogeneity
of the explanatory variable(s)

31.08.2015 © Peter Winker 2015 1.2 - 17

Example

Rents II
Dependent Variable: RENT
Method: Least Squares
Sample: 1 19644 IF WAGE_M>0 AND RENT>0
Included observations: 1406

Variable Coefficient Std. Error t-Statistic Prob.

C 488.2894 21.15471 23.08183 0.0000

WAGE_M 0.057002 0.004814 11.83969 0.0000
NO_CHILD 24.99878 5.272731 4.741144 0.0000
AGE -1.163311 0.498885 -2.331823 0.0199
UNIV_DEGREE 46.86901 19.48013 2.405991 0.0163
REGION -60.33521 12.07150 -4.998154 0.0000
SMOKING -34.09685 10.52673 -3.239072 0.0012

R-squared 0.129564 Mean dependent var 540.0512

Are rent payment lower BECAUSE someone is a SMOKER?

31.08.2015 © Peter Winker 2015 1.2 - 18

Example C: regression constant
WAGE_M: monthly gross wage income
Rents II
NO_CHILDREN:
AGE:
number of children in househols
age in years
UNIV_DEGREE: 0 – no, 1 – yes
REGION: living in East Germany: 0 – no, 1 – yes
Dependent Variable: RENT
Method: Least Squares
SMOKER: smoking: 0- no, 1 - yes
Sample: 1 19644 IF WAGE_M>0 AND RENT>0
Included observations: 1406

Variable Coefficient Std. Error t-Statistic Prob.

C 488.2894 21.15471 23.08183 0.0000

WAGE_M 0.057002 0.004814 11.83969 0.0000
NO_CHILD 24.99878 5.272731 4.741144 0.0000
AGE -1.163311 0.498885 -2.331823 0.0199
UNIV_DEGREE 46.86901 19.48013 2.405991 0.0163
REGION -60.33521 12.07150 -4.998154 0.0000
SMOKING -34.09685 10.52673 -3.239072 0.0012

R-squared 0.129564 Mean dependent var 540.0512

Are rent payment lower BECAUSE someone is a SMOKER?

31.08.2015 © Peter Winker 2015 1.2 - 19

Calculus

Exogeneity I
• Decomposition of the density fG of the joint
distribution FG of W = [Y X] with θ = (θ1 θ2):
f G (W | θ) f K (Y | X,θ) ⋅ f M (X | θ)
=
• Special case:
f G (W | θ) f K (Y | X,θ1 ) ⋅ f M (X | θ 2 )
=
where θ1 and θ2 are (functional) independent
⇒ inference on θ1 independent of fM(X|θ2):
X is (weakly) exogenous with regard to θ1
31.08.2015 © Peter Winker 2015 1.2 - 20
Calculus

Exogeneity II
• The decision on how to split up [Y X] and
(θ1,θ2) depends on the modeling context
(there is rarely something like „natural
exogeneity“ in econometric applications)
• Reparametrising the model allows for
alternative decompositions

31.08.2015 © Peter Winker 2015 1.2 - 21

 How to obtain exoengeity?
• Exogenity of a variable is always a
function of the analysis at hand.
• The assumption of exogeneity might be
derived from theory.
• Exogeneity might be considered a
reasonable approximation (to be tested).
• Exogeneity might results from a (natural)
experiment or quasi-experiment.

31.08.2015 © Peter Winker 2015 1.2 - 22

 References

• CT:3
• WB: 1
• J.J. Heckmann (2008): “Econometric
Causality”, International Statistical Review,
76/1, pp. 1-27.

31.08.2015 © Peter Winker 2015 1.2 - 23

 1.2. End

Advanced Econometrics – WS 2015/16