Homework: Panel Data

Work with a group (3 students per group)

1. Use the data RENTAL for this exercise. The data on rental prices and other variables for college
towns are for the years 2021 and 2022. The idea is to see whether a stronger presence of students
affects rental rates. The basic model of the rental price is

log(𝑟𝑒𝑛𝑡!" ) = 𝛽# + 𝛽$ log(𝑝𝑜𝑝!" ) + 𝛽% log(𝑎𝑣𝑔𝑖𝑛𝑐!" ) + 𝛽& 𝑝𝑐𝑡𝑠𝑡𝑢!" + 𝑢!"

where pop is city population, avginc is average income, and pctstu is student population as a
percentage of city population (during the school year).

a. Estimate the model by pooled OLS, fixed effect, and random effect. Which one is the best
model: pooled OLS, fixed effect, or random effect? Justify your answer.
b. Using the best model from part (a), interpret all the coefficients on the estimation result.
Does the relative size of the student population appear to affect rental prices?
c. If there is 15% increase in population, what is the change in rental prices?
d. We would like to know whether year 2021 or year 2022 had higher rental prices. The basic
model is

log(𝑟𝑒𝑛𝑡!" ) = 𝛽# + 𝛽$ log(𝑝𝑜𝑝!" ) + 𝛽% log(𝑎𝑣𝑔𝑖𝑛𝑐!" ) + 𝛽& 𝑝𝑐𝑡𝑠𝑡𝑢!" + 𝛽' 𝑑2022" + 𝑢!"

Where d2022 is dummy variable (d2022 =1 for year 2022; d2021=0 for year 2021).
Estimate the equation with the best model (pooled OLS, fixed effect, or random effect). Is
there any significant difference between 2021 and 2022 in rental price? Explain.

2. The following equation explains the effect of the job training grant on hours of job training per
employee:

ℎ𝑟𝑠𝑒𝑚𝑝!" = 𝛽# + 𝛽$ 𝑔𝑟𝑎𝑛𝑡!" + 𝛽% log(𝑠𝑎𝑙𝑒𝑠!" ) + 𝛽& log(𝑒𝑚𝑝𝑙𝑜𝑦!" ) + 𝑢!"

The dependent variable is hours of training per employee (hrsemp), at the firm level. The variable
grant is a dummy variable equal to one if the firm received a job training grant and zero otherwise.
The variables sales and employ represent annual sales and number of employees, respectively. We
cannot enter hrsemp in logarithmic form because hrsemp is zero for some firms.

The equation was estimated using data from 50 firms in 2000-2022 (3 years). We estimated the
model with several method: pooled least squared, Fixed effects and Random effect. The regression
results are as follows:
 Variables Pooled OLS* Fixed Effects* Random effects*
Grant 7.475285 9.566285 9.702303
(3.57686) (4.67585) (4.423531)
log(sales) -0.597926 -0.797823 -0.680145
(0.545417) (0.748414) (0.788465)
Log(employ) -0.8187883 -0.9187861 -0.7943746
(0.384531) (0.372318) (0.216844)
C 15.57915 16.58912 15.25271
(26.39668) (26.39668) (25.65297)

R squared 0.227 0.347 0.348

*Standard error values are in the parentheses

Hausman test

Likelihood Ratio

a. Based on the estimation result, which one is the best model: pooled OLS, fixed effect, or
random effect? Justify your answer.
b. Using the best model from part (a), interpret all the coefficients on the estimation result.
c. If a firm has 15% more employees, what is the change in number of hours of training per
employee ?
d. If annual sales of the firm decrease by 20%, what is the change in number hours of training
per employee?