Regression coefficients

Model

^
Salary=¿13 + 2.3Educ – 0.06Fathinc + 1.3Employees – 1.2Height + 3.2Train + 2.1Govtcont
(4) (1.1) (0.07) (0.5) (1.1) (0.95) (1.0)

n=637, R-squared=.623
Salary: thousands of dollars per year
Education: years of education
Fathinc: father’s income in thousands of dollars per year
Employees: number employees in firm (hundreds)
Height: employee’s height in inches
Train: index of employee’s completed training activities ranging from 0 to 10.
Govtcont: number of government contracts
Rep: firm reputation

1. Interpret the intercept. Does it have a substantively important meaning?

The intercept implies that the estimated salary in dollars for a person with no education,
no father’s income, not an employee, no height, no training, and no government contracts
is $13. The intercept can both be substantive and meaning or not depending on how we
consider this model.
No, the intercept does not have a substantive meaning because you can’t earn any salary
if you are not an employee of a company.
Yes, the intercept has a substantive meaning because we expect people who are employed
to enjoy unemployment benefits.

2. Interpret the coefficients for each of the variables. State what your theoretical priors are for each
variable. Discuss whether each coefficient fits these priors.

Education- An additional year of education will result in a 2.3 percentage points increase in an
employee's salary, holding other factors constant. I expect the sign of education to be positive or
greater than zero because higher education corresponds to increase pay. Yes, education fits this
model. I will consider education as my primary independent variable in this model.

Father's income- A thousand dollars increase in income of an employee's father in a year, on

average, will result in a 0.06 percentage point decrease in an employee salary, holding other
factors constant. I do not see any meaningful relationship between a father's income and how
much a son earns as a salary. Even if there is any relationship at all, I expect the sign to be
positive because the higher a father's income, the better education a child will receive, all things
being equal. With more education, I expect the son to earn a higher salary and not a lower salary.

Employee – One unit increase in the number of employees will lead to 1.3 percentage point
increase in salary, holding other factors constant. I expect an increase in employees' number to
increase salary because more employees mean greater output or more government contracts.
Employee sign could also be negative if we apply the law of diminishing marginal returns. When
output does not match an input, it will lower revenue and possibly decrease salary and bonuses
for employees.
 Height- An increase in employee's height by one inch will result in an estimated 1.2 percentage
point decrease in salary, holding other factors constant. I am not sure the role height plays in the
determination of one's compensation. Even in NBA sports where height is advantageous, a
player's height does not determine how much he/she earns. Height does not fit in this model.

Training- An additional year of training will result in an estimated 3.2 percentage point increase
in salary, holding other factors constant. I expect the sign of training to be greater than 0 or
positive because more training leads to improved skills. Improved skills are likely to earn better
jobs with better pay. Training fits the model precisely.

Government contracts – An additional increase in government contracts will lead to a 2.1

percentage increase in salary, holding other factors constant. Business is about deals because
more contracts bring more revenue to the company gets. This is likely to result in higher
commission or bonuses for employees, thereby increasing salary. A positive sign is appropriate
for government contracts, and the variable righty fits this model.

3. Conduct a two-sided t-test for each coefficient. Use 1.96 as your critical value at a 5%
significance level. For each, state null, alternative, and your decision. How do your decisions
inform your answers to #2.

Decision rule, reject H0 if the critical value < t-test (or t-obtained)…When you reject H 0, it implies
the relationship is statistically significant at the 5% C.I.

We fail to reject H0 if the critical value > t-test….thus, the relationship is not statistically
significant.

Test statistics for education

H0 : = B 1
H1: ≠ B1
Critical value at 5% significant level= 1.96
T-test = 2.3/1.1
= 2.09
Decision- We reject H0 since the critical value is less than the t-test value. It means there is a
statistically significant relationship between education and salary. This confirms my opinion in
number 2; thus, the level of education influences employees' salary.

Father’s income
H0 : = B 2
H1: ≠ B2
Critical value at 5% significant level= 1.96
T-test = 0.06/0.07
= 0.857
Decision: Since the critical value is greater than the t-test value, we fail to reject H 0. It implies
there is no statistically significant relationship between a father's income and a child's salary. The
result confirms my arguments that I do not see any connection between a father's income and how
much a child earns as a salary.

Number of Employees
H0 : = B 3
H1: ≠ B3
 Critical value at 5% significant level= 1.96
T-test = 1.3/0.5
= 2.6
Decision- We reject H0 since the critical value is less than the t-test value. This means there is a
statistically significant relationship between the number of employees and how much one earns. It
confirms my position that employee size determines how much one makes.

Height
H0 : = B 4
H1: ≠ B4
Critical value at 5% significant level= 1.96
T-test = 1.2/1.1
= 1.09

Decision: Since the critical value is greater than the t-test value, we fail to reject H 0. It implies
there is no statistically significant relationship between height and how much a person earns as a
salary. Again, this confirms my arguments that there is no relationship between height and salary.

Training
H0 : = B 5
H1: ≠ B5
Critical value at 5% significant level= 1.96
T-test = 3.2/0.95
= 3.368

Decision- We reject H0 since the critical value is less than the t-test value. It means there is a
statistically significant relationship between years of training and how much one earns as a salary.
It confirms my opinion in number 2; thus, one is expected to earn more if they acquire higher
skills through years of training.

Government Contract
H0 : = B 6
H1: ≠ B6
Critical value at 5% significant level= 1.96
T-test = 2.1/1.0
= 2.1

Decision- We reject H0 since the critical value is less than the t-test value. It means there is a
statistically significant relationship between the number of government contracts and how much
one earns as a salary. It confirms my argument in #2 that the more contracts a company wins, the
higher pay and bonuses for employees.

4. Suppose you add a variable, Rep, that measures the quality of the company's reputation (higher
scores indicate better reputation) and gets the following results.

.^
Salary=¿13 + 2.3Educ – 0.06Fathinc + 2.8Employees – 1.2Height + 3.2Train + 2.1Govtcont + 4.1Rep
(4) (1.1) (0.07) (1.2) (1.1) (0.95) (1.0) (1.0)
n=637, R-squared=.689

What must be true about the correlation between reputation and the number of employees in the sample?
There is a tendency of a strong correlation between the number of employees and firm reputation since
firms with high prestige are usually global firms with thousands of workforce. Thus, there is the
possibility of multicollinearity between these two variables. It makes the coefficients very sensitive to
small changes in the model. Also, it can reduce the precision of the estimate coefficients, which weakens
the statistical power of the regression model.

Do government contracts tend to go to firms with strong reputations? Yes,

5. Evaluate the following statements.

a. Those with college educations have salaries 2.3 times higher than those with high school
educations.
This statement is true because education was positive in the model; therefore, we expect
higher educational achievement to reflect salary increase. But for this statement to be
entirely accurate, we must hold other factors in the model constant to ensure that these
other factors are not causing salary to change.

b. Government Contracts likely have a positive coefficient because larger firms tend to
secure more government business and are also more profitable.

Government contracts will still be positive irrespective of the firm size and the company's
revenue base because government contracts always increase firms' revenue base
regardless of the size. It will be strange for government contracts to be negative in this
model. Unless there are issues of improper execution of contracts, lawsuits, and lack of
insurance coverage to cover contract damages, they are likely to drain the company's
finances due to taking up that contract.

6. Suppose your colleague suggests that company characteristics are not important in understanding
income variation. Write the null hypothesis that captures this. How would you test this?

Firm Reputation
H0 : = B 7
H1: ≠ B7
Critical value at 5% significant level= 1.96
T-test = 4.1/1.0
= 4.1
Decision- We reject H0 since the critical value is less than the t-test value. It means there is a statistically
significant relationship between a company’s reputation and how much one earns as a salary. Therefore,
I'm afraid I have to disagree with my friend.