Econometrics M1-TSE Final Exam Dec 2013

• You have 2 hours to write the exam.

• Use the results from the course.
• You can use the course notations without recalling their definitions.
If you have to use a new shortcut notation, give a definition.
• (SA) indicates that a short answer (typically one or two sentences, or one
formula) is sufficient.
• Total number of marks = 50

Exercise 1. The Poisson distribution is used to model the number of events occurring in a fixed
period of time (such as the number of customers in a day).
Let y1 , . . . , yn be a random sample from y, which is distributed as a Poisson variable with parameter
λ > 0. The probability distribution of y for the true value λ0 is given by

λk0 exp (−λ0 )

Pr (y = k; λ0 ) = k = 0, 1, . . .
k!
where k! denotes the factorial of k. Moreover E y = Var y = λ0 . The likelihood of a single observation
yi is then
λyi exp (−λ)
l(λ; yi ) =
yi !

1. [3 marks] Show that the maximum likelihood estimator λ b of λ0 is the sample average ȳ. That is,
write the first order conditions (F.O.C.) of the maximization procedure and deduce the maximum
likelihood estimator from there.

2. [3 marks] Determine the information matrix I (λ0 ). (NB: Because the parameter is scalar, the
information matrix is also scalar.) Give a consistent estimator of it. (A statement is sufficient for
the last part of the question.)

3. [2 marks] (SA) What is the asymptotic distribution of the maximum likelihood estimator? (A
statement is sufficient for this question, no proof is expected)

4. [3 marks] (SA) We want to test H0 : λ0 = λ∗ against H1 : λ 6= λ∗ , where λ∗ is a specific value.

What is the Wald statistic for the test? What is its asymptotic distribution? Give the rejection
region of the test at level α. (Statements are sufficient for this question, no proof is expected)

5. [4 marks] Determine the likelihood ratio test statistic for testing H0 against H1 and give the
rejection region of the test at level α.

6. [5 marks] Show that the LR test is convergent, i.e. if λ0 6= λ∗ , the test rejects H0 with probability
tending to 1. (we will admit that for any x > 0, log x + x1 − 1 > 0 whenever x 6= 1).
Econometrics M1-TSE Final Exam Dec 2013

Exercise 2.
We want to determine if alcohol dependency has an impact on the employability of people. To address
this question, we use a sample composed of 1268 US men and women aged 25 to 59. We consider
a linear model in which the dependent variable employed is equal to 1 if the person is employed,
0 otherwise. The first explanatory variable is the unemployment rate in the state where the person
lives, denoted stunempl. This variable is expressed in percent, i.e. stunempl=7 means that the
unemployment rate is equal to 7 percent. Other explanatory variables are years of education of the
individual (educ), a variable equal to the product of educ and stunempl, denoted educ*stunempl,
an indicator variable equal to 1 if the person is married (married), an indicator variable equal to 1
if the person has a poor health status (poorhlth), and an indicator variable equal to 1 if the person
is alcohol dependent (alcdep).
The model has been estimated by OLS. Results are reported in the first column of Table 1.
1. [2 marks] (SA) What is the impact of alcohol dependency on the employment probability?
2. [3 marks] (SA) What is the marginal impact of education on the employment probability in a
state with an unemployment rate equal to 7 percent.
3. [5 marks] We want to test if the impact of education varies with the unemployment rate in the
state, using the p-value approach. You should write the null and alternative hypothesis, give
the form of the test statistic, its behavior under the null hypothesis. Then, compute the test
statistic, give an interval for the p-value and conclude.

We suspect the variable alcdep to be endogenous. A two-stages least square estimation is performed,
using the following instruments: the per capita alcohol consumption in individual’s state (stalccon),
the tax rate on beer in individual’s state (beertax), two indicator variables equal to 1 if the birth
mother and father were alcoholic (momalc and dadalc). The second-stage results are reported in
the second column of Table 1.
4. [2 marks] (SA) Give one possible reason for the endogeneity of alcdep. Explain briefly.
5. [6 marks] Test for the presence of endogeneity by applying a Hausman test. You should write
the null and alternative hypothesis, give the form of the test statistic, its behavior under the null
hypothesis, the formal decision rule, and your conclusion based on the above results.

1
The model is now estimated using a logit specification. The logistic CDF is given by: F (t) = 1+exp(−t) .
Results of the maximum-likelihood estimation are reported in Table 2.
6. [2 marks] (SA) Write the log-likelihood of the sample.
7. [1 mark] (SA) Why should we favor a logit model instead of a linear model?
8. [4 marks] Calculate the marginal impact of alcohol dependency on the employment probability
for a non married individual with 10 years of education and a good health status who lives in a
state with an unemployment rate of 7 percent.
9. [5 marks] We add the age of the person as an explanatory variables in the logit model. The
estimation of the new model gives a log-likelihood value for the sample equal to -570.9878. Test
if the variable age is significant using a LR test. You should write the null and alternative
hypothesis, give the form of the test statistic, its behavior under the null hypothesis, the formal
decision rule, and your conclusion based on the above results.

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Econometrics M1-TSE Final Exam Dec 2013

Table 1: Estimation results: OLS and IV

Dependent variable: (1) (2)
employed OLS IV
stunempl -0.0616 -0.0769
(0.0239) (0.0289)
educ -0.0083 -0.0178
(0.0113) (0.0145)
educ*stunempl 0.0050 0.0063
(0.0019) (0.0024)
married 0.0860 0.0654
(0.0274) (0.0341)
poorhlth -0.4985 -0.4745
(0.0458) (0.0541)
alcdep -0.1073 -0.7072
(0.0340) (0.4478)
Intercept 0.8598 1.0556
(0.1428) (0.2156)
N 1268
R2 0.1454

Note: Standard errors under parenthesis

Table 2: Estimation results: logit

Dependent variable: employed Logit
stunempl -0.3638
(0.1558)
educ -0.0437
(0.0787)
educ*stunempl 0.0314
(0.0136)
married 0.5410
(0.1777)
poorhlth -2.3279
(0.2815)
alcdep -0.6564
(0.2103)
Intercept 1.6200
(0.9293)
N 1268
Log-likelihood -573.1608

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Econometrics M1-TSE Final Exam Dec 2013

Quantiles x of order β from a N (0, 1), defined as Φ(x) = β.

β 0.9 0.95 0.975 0.99 0.995 0.999 0.9995 0.99995
x 1.2816 1.6449 1.96 2.3263 2.5758 3.0902 3.2905 3.8906

Quantiles of order β of a χ2 with p degrees of freedom such that Pr(X ≤ x) = β with X ∼ χ2p .
β
0.05 0.1 0.2 0.3 0.5 0.7 0.8 0.9 0.95 0.99 0.999
1 0.004 0.02 0.06 0.15 0.46 1.07 1.64 2.71 3.84 6.64 10.83
2 0.1 0.21 0.45 0.71 1.39 2.41 3.22 4.6 5.99 9.21 13.82
p 3 0.35 0.58 1.01 1.42 2.37 3.66 4.64 6.25 7.82 11.34 16.27
4 0.71 1.06 1.65 2.2 3.36 4.88 5.99 7.78 9.49 13.28 18.47
5 1.14 1.61 2.34 3 4.35 6.06 7.29 9.24 11.07 15.09 20.52

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