Practise Final

ECO 403
Advanced Econometrics (Monsoon 2021)
Total marks: 60
1. (10 marks) In this course you read the Nunn (2008) paper on slavery. In his paper,
Nunn uses the sailing distance from each country to the most important destinations in
each of the slave trades as instruments for slave exports from a country. Discuss in your
own words why this is a valid instrument.
2. Suppose we have a two-equation system to represent a supply-demand framework. As
seen in class, the same variable y1 (typically “quantity”) appears on the left-hand side:

y1 = α1 y2 + β1 z1 + u1
y1 = α2 y2 + β2 z2 + u2

(a) (2 marks) If y1 represents quantity, what variable would y2 typically represent? (2

marks)

(b) (5 marks) If α1 = 0 or α2 = 0, show that a reduced form exists for y1 .If α1 6= 0 and
α2 = 0, find the reduced form for y2 . (Hint: Remember a reduced form expresses the
relevant variable as a linear function of the exogenous variables and the structural
errors.)
(c) (5 marks) If α1 6= 0, α2 6= 0 and α1 6= α2 , find the reduced form for y1 . Does y2
have a reduced form in this case?
(d) (5 marks) Is the condition α1 6= α2 likely to be met in supply and demand exam-
ples? Explain.

3. Consider a change in labour policy in India in 1999 and suppose that it only affected
S1 specific states out of S states. Suppose that you have individual level employment
data on all states for the period 1990-2010 from a representative survey and you want to
find the effect of this policy change on employment. Employment data includes data on
whether an individual is working, whether they are looking for work and weekly hours
of labour supply of a given individual. You can also identify the S1 states affected by
the policy change.

Suppose you want to find the effect on labour force participation. The labour force
participation variable takes the value 1 if an individual is working or is looking for work
and 0 otherwise. Hence it takes 0 only if the individual is unemployed and not looking
for work.
 (a) (5 marks) Consider following two methods for finding out the effect of the policy
change on employment:
a)Take post 1999 data and compare the average labour force participation rate of
the S1 states affected by the change with the S −S1 states not affected by the policy
change.
b)Take S1 states affected by the policy change and compare the average labour force
participation rate pre 1999 with the average employment post 1999.
Very briefly explain what are the problems with the above two methods?
(b) (10 marks) Can you suggest an improvement over these methods using only the
available data? Write the main estimating equation of the method suggested by
you. Write down and explain clearly the assumptions that you need in order for
your suggested method to be valid.

4. PMGSY is a rural road construction programme that aims to provide all-weather con-
nectivity to rural habitations. Let us assume that the program was implemented only
in habitations with population above 500 as of the 2001 census.

(a) (10 marks) How would you measure the effect of the program on local economic
development? Explain. Again mention the assumption/s and estimating equation/s
briefly.
(b) (5 marks) Now suppose you come to know the gram panchayat pradhans knew of
the program allocation rule and also that in large parts of the country, Census offi-
cials rely on gram panchayat pradhans to provide them with habitation population
figures. Does this create problems for the estimation strategy you mention in part
a? Explain.

5. (3 marks) Stata trivia: If you use the robust option when running a regression in Stata,
will you get different estimates of the coefficient than when you do not use the robust
option? Explain. (Hint: this is a two sentences answer- no math needed.)

Page 2