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Wooldridge
Introductory
Econometrics
Introductory
A Modern Approach 7e
Econometrics
A Modern Approach
7e
Jeffrey M. Wooldridge
SE/Author/Author, Title Xe ISBN-13: 978XXXXXXXXXX ©2015 Designer:

Printer: Binding: Casebound Trim: 8" x 10" CMYK
Introductory
Econometrics
A Modern Approach
Seventh Edition
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Brief Contents
Chapter 1 The Nature of Econometrics and Economic Data 1
Part 1: Regression Analysis with Cross-Sectional Data 19

Chapter 2 The Simple Regression Model 20
Chapter 3 Multiple Regression Analysis: Estimation 66
Chapter 4 Multiple Regression Analysis: Inference 117
Chapter 5 Multiple Regression Analysis: OLS Asymptotics 163
Chapter 6 Multiple Regression Analysis: Further Issues 181
Chapter 7 Multiple Regression Analysis with Qualitative Information 220
Chapter 8 Heteroskedasticity262
Chapter 9 More on Specification and Data Issues 294
Part 2: Regression Analysis with Time Series Data 333

Chapter 10 Basic Regression Analysis with Time Series Data 334
Chapter 11 Further Issues in Using OLS with Time Series Data 366
Chapter 12 Serial Correlation and Heteroskedasticity in Time Series Regressions 394
Part 3: Advanced Topics 425

Chapter 13 Pooling Cross Sections across Time: Simple Panel Data Methods 426
Chapter 14 Advanced Panel Data Methods 462
Chapter 15 Instrumental Variables Estimation and Two-Stage Least Squares 495
Chapter 16 Simultaneous Equations Models 534
Chapter 17 Limited Dependent Variable Models and Sample Selection Corrections 559
Chapter 18 Advanced Time Series Topics 604
Chapter 19 Carrying Out an Empirical Project 642
Appendices
Math Refresher A Basic Mathematical Tools 666
Math Refresher B Fundamentals of Probability 684
Math Refresher C Fundamentals of Mathematical Statistics 714
Advanced Treatment D Summary of Matrix Algebra 749
Advanced Treatment E The Linear Regression Model in Matrix Form 760
Answers to Going Further Questions 775

Statistical Tables 784
References791
Glossary797
Index812
iii

Contents
Preface xii 2-4 Units of Measurement and Functional Form 36

About the Author xxii 2-4a The Effects of Changing Units of Measurement
on OLS Statistics 36
2-4b Incorporating Nonlinearities in Simple
chapter 1The Nature of Econometrics Regression 37
and Economic Data 1 2-4c The Meaning of “Linear” Regression 40
1-1 What Is Econometrics? 1 2-5 Expected Values and Variances of the OLS
Estimators 40
1-2 Steps in Empirical Economic Analysis 2
2-5a Unbiasedness of OLS 40
1-3 The Structure of Economic Data 5 2-5b Variances of the OLS Estimators 45
1-3a Cross-Sectional Data 5 2-5c Estimating the Error Variance 48
1-3b Time Series Data 7
2-6 Regression through the Origin and Regression
1-3c Pooled Cross Sections 8 on a Constant 50
1-3d Panel or Longitudinal Data 9
2-7 Regression on a Binary Explanatory
1-3e A Comment on Data Structures 10 Variable 51
1-4 Causality, Ceteris Paribus, and Counterfactual 2-7a Counterfactual Outcomes, Causality, and Policy
Reasoning 10 Analysis 53
Summary 14 Summary 56
Key Terms 15 Key Terms 57
Problems 15 Problems 58
Computer Exercises 15 Computer Exercises 62
Part 1 chapter 3 Multiple Regression Analysis:

Regression Analysis with Estimation 66
Cross-Sectional Data 19 3-1 Motivation for Multiple Regression 67
3-1a The Model with Two Independent Variables 67
chapter 2 The Simple Regression Model 20 3-1b The Model with k Independent Variables 69
3-2 Mechanics and Interpretation of Ordinary Least
2-1 Definition of the Simple Regression Model 20
Squares 70
2-2 Deriving the Ordinary Least Squares Estimates 24
3-2a Obtaining the OLS Estimates 70
2-2a A Note on Terminology 31
3-2b Interpreting the OLS Regression Equation 71
2-3 Properties of OLS on Any Sample of Data 32 3-2c On the Meaning of “Holding Other Factors Fixed”
2-3a Fitted Values and Residuals 32 in Multiple Regression 73
2-3b Algebraic Properties of OLS Statistics 32 3-2d Changing More Than One Independent Variable
2-3c Goodness-of-Fit 35 Simultaneously 74
iv

Contents v
3-2e OLS Fitted Values and Residuals 74 4-2e A Reminder on the Language of Classical
3-2f A “Partialling Out” Interpretation of Multiple Hypothesis Testing 132
Regression 75 4-2f Economic, or Practical, versus Statistical
3-2g Comparison of Simple and Multiple Regression Significance 132
Estimates 75 4-3 Confidence Intervals 134
3-2h Goodness-of-Fit 76 4-4 Testing Hypotheses about a Single Linear
3-2i Regression through the Origin 79 Combination of the Parameters 136
3-3 The Expected Value of the OLS Estimators 79 4-5 Testing Multiple Linear Restrictions: The
3-3a Including Irrelevant Variables in a Regression F Test 139
Model 83 4-5a Testing Exclusion Restrictions 139
3-3b Omitted Variable Bias: The Simple Case 84 4-5b Relationship between F and t Statistics 144
3-3c Omitted Variable Bias: More General Cases 87 4-5c The R-Squared Form of the F Statistic 145
3-4 The Variance of the OLS Estimators 87 4-5d Computing p-values for F Tests 146
3-4a The Components of the OLS Variances: 4-5e The F Statistic for Overall Significance of a
Multicollinearity 89 Regression 147
3-4b Variances in Misspecified Models 92 4-5f Testing General Linear Restrictions 148
3-4c Estimating s2: Standard Errors of the OLS 4-6 Reporting Regression Results 149
Estimators 93
4-7 Revisiting Causal Effects and Policy
3-5 Efficiency of OLS: The Gauss-Markov Analysis 151
Theorem 95
Summary 152
3-6 Some Comments on the Language of Multiple
Key Terms 154
Regression Analysis 96
Problems 154
3-7 Several Scenarios for Applying Multiple
Regression 97 Computer Exercises 159
3-7a Prediction 98
3-7b Efficient Markets 98 chapter 5 Multiple Regression Analysis: OLS
3-7c Measuring the Tradeoff between Two Asymptotics 163
Variables 99
3-7d Testing for Ceteris Paribus Group 5-1 Consistency 164
Differences 99 5-1a Deriving the Inconsistency in OLS 167
3-7e Potential Outcomes, Treatment Effects, and Policy 5-2 Asymptotic Normality and Large Sample
Analysis 100 Inference 168
Summary 102 5-2a Other Large Sample Tests: The Lagrange
Key Terms 104 Multiplier Statistic 172
Problems 104 5-3 Asymptotic Efficiency of OLS 175
Computer Exercises 109 Summary 176
Key Terms 176
chapter 4 Multiple Regression Analysis: Problems 176
Inference 117 Computer Exercises 178
4-1 Sampling Distributions of the OLS chapter 6 Multiple Regression Analysis:

Estimators 117 Further Issues 181
4-2 Testing Hypotheses about a Single Population
Parameter: The t Test 120 6-1 Effects of Data Scaling on OLS Statistics 181
4-2a Testing against One-Sided Alternatives 122 6-1a Beta Coefficients 184
4-2b Two-Sided Alternatives 126 6-2 More on Functional Form 186
4-2c Testing Other Hypotheses about bj 128 6-2a More on Using Logarithmic Functional
4-2d Computing p-Values for t Tests 130 Forms 186

vi Contents
6-2b Models with Quadratics 188 7-7 Interpreting Regression Results with Discrete
6-2c Models with Interaction Terms 192 Dependent Variables 249
6-2d Computing Average Partial Effects 194 Summary 250
6-3 More on Goodness-of-Fit and Selection of Key Terms 251
Regressors 195 Problems 251
6-3a Adjusted R-Squared 196
Computer Exercises 256
6-3b Using Adjusted R-Squared to Choose between
Nonnested Models 197
6-3c Controlling for Too Many Factors in Regression
chapter 8 Heteroskedasticity 262
Analysis 199
8-1 Consequences of Heteroskedasticity for OLS 262
6-3d Adding Regressors to Reduce the Error
Variance 200 8-2 Heteroskedasticity-Robust Inference after OLS
Estimation 263
6-4 Prediction and Residual Analysis 201
8-2a Computing Heteroskedasticity-Robust LM
6.4a Confidence Intervals for Predictions 201
Tests 267
6-4b Residual Analysis 205
8-3 Testing for Heteroskedasticity 269
6-4c Predicting y When log(y) Is the Dependent
Variable 205 8-3a The White Test for Heteroskedasticity 271
6-4d Predicting y When the Dependent Variable Is 8-4 Weighted Least Squares Estimation 273
log(y) 207 8-4a The Heteroskedasticity Is Known up to a
Summary 209 Multiplicative Constant 273
8-4b The Heteroskedasticity Function
Key Terms 211
Must Be Estimated: Feasible GLS 278
Problems 211 8-4c What If the Assumed Heteroskedasticity Function Is
Computer Exercises 214 Wrong? 281
8-4d Prediction and Prediction Intervals with
chapter 7 Multiple Regression Analysis with Heteroskedasticity 283
Qualitative Information 220 8-5 The Linear Probability Model Revisited 284
Summary 286
7-1 Describing Qualitative Information 221 Key Terms 287
7-2 A Single Dummy Independent Problems 287
Variable 222
7-2a Interpreting Coefficients on Dummy
Explanatory Variables When the Dependent
Variable Is log(y) 226 chapter 9 More on Specification and
7-3 Using Dummy Variables for Multiple Data Issues 294
Categories 228
7-3a Incorporating Ordinal Information by Using 9-1 Functional Form Misspecification 295
Dummy Variables 230 9-1a RESET as a General Test for Functional
Form Misspecification 297
7-4 Interactions Involving Dummy Variables 232
9-1b Tests against Nonnested Alternatives 298
7-4a Interactions among Dummy Variables 232
7-4b Allowing for Different Slopes 233 9-2 Using Proxy Variables for Unobserved Explanatory
Variables 299
7-4c Testing for Differences in Regression Functions
across Groups 237 9-2a Using Lagged Dependent Variables as Proxy
Variables 303
7-5 A Binary Dependent Variable: The Linear
9-2b A Different Slant on Multiple Regression 304
Probability Model 239
9-2c Potential Outcomes and Proxy Variables 305
7-6 More on Policy Analysis and Program
Evaluation 244 9-3 Models with Random Slopes 306
7-6a Program Evaluation and Unrestricted Regression 9-4 Properties of OLS under Measurement Error 308
Adjustment 245 9-4a Measurement Error in the Dependent Variable 308

Contents vii
9-4b Measurement Error in an Explanatory Problems 361

Variable 310 Computer Exercises 363
9-5 Missing Data, Nonrandom Samples, and Outlying
Observations 313
chapter 11 Further Issues in Using OLS with
9-5a Missing Data 313
9-5b Nonrandom Samples 315 Time Series Data 366
9-5c Outliers and Influential Observations 317
11-1 Stationary and Weakly Dependent Time
9-6 Least Absolute Deviations Estimation 321 Series 367
Summary 323 11-1a Stationary and Nonstationary Time Series 367
Key Terms 324 11-1b Weakly Dependent Time Series 368
Problems 324 11-2 Asymptotic Properties of OLS 370
Computer Exercises 328 11-3 Using Highly Persistent Time Series in Regression
Analysis 376
Part 2 11-3a Highly Persistent Time Series 376
11-3b Transformations on Highly Persistent Time
Regression Analysis with Time Series 380
11-3c Deciding Whether a Time Series Is I(1) 381
Series Data 333
11-4 Dynamically Complete Models and the Absence of
Serial Correlation 382
chapter 10 Basic Regression Analysis with 11-5 The Homoskedasticity Assumption for Time
Time Series Data 334 Series Models 385
Summary 386
10-1 The Nature of Time Series Data 334
Key Terms 387
10-2 Examples of Time Series Regression
Models 335 Problems 387
10-2a Static Models 336 Computer Exercises 390
10-2b Finite Distributed Lag Models 336
10-2c A Convention about the Time Index 338 chapter 12 Serial Correlation and
10-3 Finite Sample Properties of OLS under Classical Heteroskedasticity in Time Series
Assumptions 339
Regressions 394
10-3a Unbiasedness of OLS 339
10-3b The Variances of the OLS Estimators and the 12-1 Properties of OLS with Serially Correlated
Gauss-Markov Theorem 342 Errors 395
10-3c Inference under the Classical Linear Model 12-1a Unbiasedness and Consistency 395
Assumptions 344 12-1b Efficiency and Inference 395
10-4 Functional Form, Dummy Variables, and Index 12-1c Goodness-of-Fit 396
Numbers 345 12-1d Serial Correlation in the Presence
10-5 Trends and Seasonality 351 of Lagged Dependent Variables 396
10-5a Characterizing Trending Time Series 351 12-2 Serial Correlation–Robust Inference
10-5b Using Trending Variables in Regression after OLS 398
Analysis 354 12-3 Testing for Serial Correlation 401
10-5c A Detrending Interpretation of Regressions 12-3a A t Test for AR(1) Serial Correlation with
with a Time Trend 356 Strictly Exogenous Regressors 402
10-5d Computing R-Squared When the Dependent 12-3b The Durbin-Watson Test under Classical
Variable Is Trending 357 Assumptions 403
10-5e Seasonality 358 12-3c Testing for AR(1) Serial Correlation without
Summary 360 Strictly Exogenous Regressors 404
Key Terms 361 12-3d Testing for Higher-Order Serial Correlation 406

viii Contents
12-4 Correcting for Serial Correlation with Strictly Summary 451

Exogenous Regressors 407 Key Terms 452
12-4a Obtaining the Best Linear Unbiased
Problems 452
Estimator in the AR(1) Model 408
12-4b Feasible GLS Estimation with AR(1)
Errors 409
12-4c Comparing OLS and FGLS 411 chapter 14 Advanced Panel
12-4d Correcting for Higher-Order Serial Data Methods 462
Correlation 413
12-4e What if the Serial Correlation Model Is 14-1 Fixed Effects Estimation 463
Wrong? 413 14-1a The Dummy Variable Regression 466
12-5 Differencing and Serial Correlation 414 14-1b Fixed Effects or First Differencing? 467
14-1c Fixed Effects with Unbalanced Panels 468
12-6 Heteroskedasticity in Time Series
Regressions 415 14-2 Random Effects Models 469
12-6a Heteroskedasticity-Robust Statistics 416 14-2a Random Effects or Pooled OLS? 473
12-6b Testing for Heteroskedasticity 416 14-2b Random Effects or Fixed Effects? 473
12-6c Autoregressive Conditional 14-3 The Correlated Random Effects Approach 474
Heteroskedasticity 417 14-3a Unbalanced Panels 476
12-6d Heteroskedasticity and Serial Correlation in 14-4 General Policy Analysis with Panel Data 477
Regression Models 418 14-4a Advanced Considerations with Policy
Summary 419 Analysis 478
Key Terms 420 14-5 Applying Panel Data Methods to Other Data
Problems 420 Structures 480
Computer Exercises 421 Summary 483
Key Terms 484
Part 3 Problems 484
Advanced Topics 425
chapter 15 Instrumental Variables Estimation
chapter 13 Pooling Cross Sections across and Two-Stage Least Squares 495
Time: Simple Panel Data Methods 426
15-1 Motivation: Omitted Variables in a Simple
Regression Model 496
13-1 Pooling Independent Cross Sections across
Time 427 15-1a Statistical Inference with the IV
Estimator 500
13-1a The Chow Test for Structural Change across
Time 431 15-1b Properties of IV with a Poor Instrumental
Variable 503
13-2 Policy Analysis with Pooled Cross Sections 431
15-1c Computing R-Squared after IV Estimation 505
13-2a Adding an Additional Control Group 436 15-2 IV Estimation of the Multiple Regression
13-2b A General Framework for Policy Analysis Model 505
with Pooled Cross Sections 437
15-3 Two-Stage Least Squares 509
13-3 Two-Period Panel Data Analysis 439 15-3a A Single Endogenous Explanatory
13-3a Organizing Panel Data 444 Variable 509
13-4 Policy Analysis with Two-Period Panel 15-3b Multicollinearity and 2SLS 511
Data 444 15-3c Detecting Weak Instruments 512
13-5 Differencing with More Than Two Time 15-3d Multiple Endogenous Explanatory
Periods 447 Variables 513
13-5a Potential Pitfalls in First Differencing Panel 15-3e Testing Multiple Hypotheses after 2SLS
Data 451 Estimation 513

Contents ix
15-4 IV Solutions to Errors-in-Variables Problems 514 17-2 The Tobit Model for Corner Solution
15-5 Testing for Endogeneity and Testing Overidentifying Responses 571
Restrictions 515 17-2a Interpreting the Tobit Estimates 572
15-5a Testing for Endogeneity 515 17-2b Specification Issues in Tobit Models 578
15-5b Testing Overidentification Restrictions 516 17-3 The Poisson Regression Model 578
15-6 2SLS with Heteroskedasticity 518 17-4 Censored and Truncated Regression Models 582
15-7 Applying 2SLS to Time Series Equations 519 17-4a Censored Regression Models 583
15-8 Applying 2SLS to Pooled Cross Sections 17-4b Truncated Regression Models 586
and Panel Data 521 17-5 Sample Selection Corrections 588
Summary 522 17-5a When Is OLS on the Selected Sample
Consistent? 588
Key Terms 523
17-5b Incidental Truncation 589
Problems 523
Summary 593
Key Terms 593
Problems 594
Simultaneous Equations
chapter 16
Models 534
16-1 The Nature of Simultaneous Equations chapter 18 Advanced Time Series Topics 604
Models 535
16-2 Simultaneity Bias in OLS 538 18-1 Infinite Distributed Lag Models 605
16-3 Identifying and Estimating a Structural 18-1a The Geometric (or Koyck) Distributed Lag
Equation 539 Model 607
16-3a Identification in a Two-Equation System 540 18-1b Rational Distributed Lag Models 608
16-3b Estimation by 2SLS 543 18-2 Testing for Unit Roots 610
16-4 Systems with More Than Two Equations 545 18-3 Spurious Regression 614
16-4a Identification in Systems with Three or More 18-4 Cointegration and Error Correction Models 616
Equations 545 18-4a Cointegration 616
16-4b Estimation 546 18-4b Error Correction Models 620
16-5 Simultaneous Equations Models with Time 18-5 Forecasting 622
Series 546
18-5a Types of Regression Models Used for
16-6 Simultaneous Equations Models with Panel Forecasting 623
Data 549 18-5b One-Step-Ahead Forecasting 624
Summary 551 18-5c Comparing One-Step-Ahead Forecasts 627
Key Terms 552 18-5d Multiple-Step-Ahead Forecasts 628
Problems 552 18-5e Forecasting Trending, Seasonal, and Integrated
Computer Exercises 555 Processes 631
Summary 635
chapter 17 Limited Dependent Variable Models Key Terms 636
and Sample Selection Corrections 559 Problems 636
17-1 Logit and Probit Models for Binary
Response 560
17-1a Specifying Logit and Probit Models 560 chapter 19Carrying Out an Empirical
17-1b Maximum Likelihood Estimation of Logit and Project 642
Probit Models 563
17-1c Testing Multiple Hypotheses 564 19-1 Posing a Question 642
17-1d Interpreting the Logit and Probit Estimates 565 19-2 Literature Review 644

x Contents
19-3 Data Collection 645 B-2 Joint Distributions, Conditional Distributions,

19-3a Deciding on the Appropriate Data Set 645 and Independence 688
19-3b Entering and Storing Your Data 646 B-2a Joint Distributions and Independence 688
19-3c Inspecting, Cleaning, and Summarizing Your B-2b Conditional Distributions 690
Data 647 B-3 Features of Probability Distributions 691
19-4 Econometric Analysis 648 B-3a A Measure of Central Tendency: The Expected
19-5 Writing an Empirical Paper 651 Value 691
19-5a Introduction 651 B-3b Properties of Expected Values 692
19-5b Conceptual (or Theoretical) B-3c Another Measure of Central Tendency: The
Framework 652 Median 694
19-5c Econometric Models and Estimation B-3d Measures of Variability: Variance and Standard
Methods 652 Deviation 695
19-5d The Data 654 B-3e Variance 695
19-5e Results 655 B-3f Standard Deviation 696
19.5f Conclusions 656 B-3g Standardizing a Random Variable 696
19-5g Style Hints 656 B-3h Skewness and Kurtosis 697
Summary 658 B-4 Features of Joint and Conditional
Distributions 697
Key Terms 658
B-4a Measures of Association: Covariance and
Sample Empirical Projects 658 Correlation 697
List of Journals 664 B-4b Covariance 697
Data Sources 665 B-4c Correlation Coefficient 698
B-4d Variance of Sums of Random Variables 699
Math Refresher A Basic Mathematical B-4e Conditional Expectation 700
Tools 666 B-4f Properties of Conditional Expectation 702
B-4g Conditional Variance 704
A-1 The Summation Operator and Descriptive B-5 The Normal and Related Distributions 704
Statistics 666 B-5a The Normal Distribution 704
A-2 Properties of Linear Functions 668 B-5b The Standard Normal Distribution 705
A-3 Proportions and Percentages 671 B-5c Additional Properties of the Normal
A-4 Some Special Functions and Their Distribution 707
Properties 672 B-5d The Chi-Square Distribution 708
A-4a Quadratic Functions 672 B-5e The t Distribution 708
A-4b The Natural Logarithm 674 B-5f The F Distribution 709
A-4c The Exponential Function 677 Summary 711
A-5 Differential Calculus 678 Key Terms 711
Summary 680 Problems 711
Key Terms 681
Problems 681 Math Refresher C Fundamentals of
Mathematical Statistics 714
Math Refresher B Fundamentals of
Probability 684 C-1 Populations, Parameters, and Random
Sampling 714
B-1 Random Variables and Their Probability C-1a Sampling 714
Distributions 684 C-2 Finite Sample Properties of Estimators 715
B-1a Discrete Random Variables 685 C-2a Estimators and Estimates 715
B-1b Continuous Random Variables 687 C-2b Unbiasedness 716

Contents xi
C-2c The Sampling Variance of Estimators 718 D-2e Partitioned Matrix Multiplication 752
C-2d Efficiency 719 D-2f Trace 753
C-3 Asymptotic or Large Sample Properties of D-2g Inverse 753
Estimators 721 D-3 Linear Independence and Rank of a
C-3a Consistency 721 Matrix 754
C-3b Asymptotic Normality 723 D-4 Quadratic Forms and Positive Definite
C-4 General Approaches to Parameter Estimation 724 Matrices 754
C-4a Method of Moments 725 D-5 Idempotent Matrices 755
C-4b Maximum Likelihood 725 D-6 Differentiation of Linear and Quadratic
C-4c Least Squares 726 Forms 755
C-5 Interval Estimation and Confidence Intervals 727 D-7 Moments and Distributions of Random
C-5a The Nature of Interval Estimation 727 Vectors 756
C-5b Confidence Intervals for the Mean from a Normally D-7a Expected Value 756
Distributed Population 729 D-7b Variance-Covariance Matrix 756
C-5c A Simple Rule of Thumb for a 95% Confidence D-7c Multivariate Normal Distribution 756
Interval 731 D-7d Chi-Square Distribution 757
C-5d Asymptotic Confidence Intervals for Nonnormal D-7e t Distribution 757
Populations 732 D-7f F Distribution 757
C-6 Hypothesis Testing 733 Summary 757
C-6a Fundamentals of Hypothesis Testing 733
Key Terms 757
C-6b Testing Hypotheses about the Mean in a Normal
Problems 758
Population 735
C-6c Asymptotic Tests for Nonnormal
Populations 738
Advanced Treatment E The Linear Regression
C-6d Computing and Using p-Values 738 Model in Matrix Form 760
C-6e The Relationship between Confidence Intervals
and Hypothesis Testing 741 E-1 The Model and Ordinary Least
Squares Estimation 760
C-6f Practical versus Statistical Significance 742
E-1a The Frisch-Waugh Theorem 762
C-7 Remarks on Notation 743
E-2 Finite Sample Properties of OLS 763
Summary 743
E-3 Statistical Inference 767
Key Terms 744
E-4 Some Asymptotic Analysis 769
Problems 744 E-4a Wald Statistics for Testing Multiple
Hypotheses 771
Advanced Treatment D Summary of Matrix Summary 771
Algebra 749 Key Terms 771
Problems 772
D-1 Basic Definitions 749
Answers to Going Further Questions 775
D-2 Matrix Operations 750
D-2a Matrix Addition 750 Statistical Tables 784
D-2b Scalar Multiplication 750 References 791
D-2c Matrix Multiplication 751 Glossary 797
D-2d Transpose 752 Index 812

Preface
In ALL content, please indent the first paragraph as well, like the following ones. My motivation
for writing the first edition of Introductory Econometrics: A Modern Approach was that I saw a fairly
wide gap between how econometrics is taught to undergraduates and how empirical researchers think
about and apply econometric methods. I became convinced that teaching introductory econometrics
from the perspective of professional users of econometrics would actually simplify the presentation,
in addition to making the subject much more interesting.
Based on the positive reactions to the several earlier editions, it appears that my hunch was correct.
Many instructors, having a variety of backgrounds and interests and teaching students with different
levels of preparation, have embraced the modern approach to econometrics espoused in this text. The
emphasis in this edition is still on applying econometrics to real-world problems. Each econometric
method is motivated by a particular issue facing researchers analyzing nonexperimental data. The focus
in the main text is on understanding and interpreting the assumptions in light of actual empirical appli-
cations: the mathematics required is no more than college algebra and basic probability and statistics.
Designed for Today’s Econometrics Course

The seventh edition preserves the overall organization of the sixth. The most noticeable feature
that distinguishes this text from most others is the separation of topics by the kind of data being ana-
lyzed. This is a clear departure from the traditional approach, which presents a linear model, lists all
assumptions that may be needed at some future point in the analysis, and then proves or asserts results
without clearly connecting them to the assumptions. My approach is first to treat, in Part 1, mul-
tiple regression analysis with cross-sectional data, under the assumption of random sampling. This
setting is natural to students because they are familiar with random sampling from a population in
their introductory statistics courses. Importantly, it allows us to distinguish assumptions made about
the underlying population regression model—assumptions that can be given economic or behavioral
content—from assumptions about how the data were sampled. Discussions about the consequences of
nonrandom sampling can be treated in an intuitive fashion after the students have a good grasp of the
multiple regression model estimated using random samples.
An important feature of a modern approach is that the explanatory variables—along with the
dependent variable—are treated as outcomes of random variables. For the social sciences, allow-
ing random explanatory variables is much more realistic than the traditional assumption of nonran-
dom explanatory variables. As a nontrivial benefit, the population model/random sampling approach
reduces the number of assumptions that students must absorb and understand. Ironically, the classical
approach to regression analysis, which treats the explanatory variables as fixed in repeated samples
and is still pervasive in introductory texts, literally applies to data collected in an experimental setting.
In addition, the contortions required to state and explain assumptions can be confusing to students.
My focus on the population model emphasizes that the fundamental assumptions underlying
regression analysis, such as the zero mean assumption on the unobservable error term, are properly
xii

Preface xiii
stated conditional on the explanatory variables. This leads to a clear understanding of the kinds of
problems, such as heteroskedasticity (nonconstant variance), that can invalidate standard inference
procedures. By focusing on the population, I am also able to dispel several misconceptions that arise
in econometrics texts at all levels. For example, I explain why the usual R-squared is still valid as a
goodness-of-fit measure in the presence of heteroskedasticity (Chapter 8) or serially correlated errors
(Chapter 12); I provide a simple demonstration that tests for functional form should not be viewed
as general tests of omitted variables (Chapter 9); and I explain why one should always include in a
regression model extra control variables that are uncorrelated with the explanatory variable of inter-
est, which is often a key policy variable (Chapter 6).
Because the assumptions for cross-sectional analysis are relatively straightforward yet realis-
tic, students can get involved early with serious cross-sectional applications without having to worry
about the thorny issues of trends, seasonality, serial correlation, high persistence, and spurious regres-
sion that are ubiquitous in time series regression models. Initially, I figured that my treatment of
regression with cross-sectional data followed by regression with time series data would find favor
with instructors whose own research interests are in applied microeconomics, and that appears to be
the case. It has been gratifying that adopters of the text with an applied time series bent have been
equally enthusiastic about the structure of the text. By postponing the econometric analysis of time
series data, I am able to put proper focus on the potential pitfalls in analyzing time series data that do
not arise with cross-sectional data. In effect, time series econometrics finally gets the serious treat-
ment it deserves in an introductory text.
As in the earlier editions, I have consciously chosen topics that are important for reading journal
articles and for conducting basic empirical research. Within each topic, I have deliberately omitted
many tests and estimation procedures that, while traditionally included in textbooks, have not with-
stood the empirical test of time. Likewise, I have emphasized more recent topics that have clearly
demonstrated their usefulness, such as obtaining test statistics that are robust to heteroskedasticity
(or serial correlation) of unknown form, using multiple years of data for policy analysis, or solving
the omitted variable problem by instrumental variables methods. I appear to have made fairly good
choices, as I have received only a handful of suggestions for adding or deleting material.
I take a systematic approach throughout the text, by which I mean that each topic is presented by
building on the previous material in a logical fashion, and assumptions are introduced only as they
are needed to obtain a conclusion. For example, empirical researchers who use econometrics in their
research understand that not all of the Gauss-Markov assumptions are needed to show that the ordi-
nary least squares (OLS) estimators are unbiased. Yet the vast majority of econometrics texts intro-
duce a complete set of assumptions (many of which are redundant or in some cases even logically
conflicting) before proving the unbiasedness of OLS. Similarly, the normality assumption is often
included among the assumptions that are needed for the Gauss-Markov Theorem, even though it is
fairly well known that normality plays no role in showing that the OLS estimators are the best linear
unbiased estimators.
My systematic approach is illustrated by the order of assumptions that I use for multiple regres-
sion in Part 1. This structure results in a natural progression for briefly summarizing the role of each
assumption:
MLR.1: Introduce the population model and interpret the population parameters (which we hope
to estimate).
MLR.2: Introduce random sampling from the population and describe the data that we use to
estimate the population parameters.
MLR.3: Add the assumption on the explanatory variables that allows us to compute the estimates
from our sample; this is the so-called no perfect collinearity assumption.
MLR.4: Assume that, in the population, the mean of the unobservable error does not depend on the
values of the explanatory variables; this is the “mean independence” assumption combined with a
zero population mean for the error, and it is the key assumption that delivers unbiasedness of OLS.

xiv Preface
After introducing Assumptions MLR.1 to MLR.3, one can discuss the algebraic properties of ordi-
nary least squares—that is, the properties of OLS for a particular set of data. By adding Assumption
MLR.4, we can show that OLS is unbiased (and consistent). Assumption MLR.5 (homoskedastic-
ity) is added for the Gauss-Markov Theorem and for the usual OLS variance formulas to be valid.
Assumption MLR.6 (normality), which is not introduced until Chapter 4, is added to round out the
classical linear model assumptions. The six assumptions are used to obtain exact statistical inference
and to conclude that the OLS estimators have the smallest variances among all unbiased estimators.
I use parallel approaches when I turn to the study of large-sample properties and when I treat
regression for time series data in Part 2. The careful presentation and discussion of assumptions
makes it relatively easy to transition to Part 3, which covers advanced topics that include using pooled
cross-sectional data, exploiting panel data structures, and applying instrumental variables methods.
Generally, I have strived to provide a unified view of econometrics, where all estimators and test sta-
tistics are obtained using just a few intuitively reasonable principles of estimation and testing (which,
of course, also have rigorous justification). For example, regression-based tests for heteroskedasticity
and serial correlation are easy for students to grasp because they already have a solid understanding
of regression. This is in contrast to treatments that give a set of disjointed recipes for outdated econo-
metric testing procedures.
Throughout the text, I emphasize ceteris paribus relationships, which is why, after one chapter on
the simple regression model, I move to multiple regression analysis. The multiple regression setting
motivates students to think about serious applications early. I also give prominence to policy analysis
with all kinds of data structures. Practical topics, such as using proxy variables to obtain ceteris pari-
bus effects and interpreting partial effects in models with interaction terms, are covered in a simple
fashion.
Designed at Undergraduates, Applicable

to Master’s Students
The text is designed for undergraduate economics majors who have taken college algebra and
one-semester of introductory probability and statistics. (Math Refresher A, B, and C contain the
requisite background material.) A one-semester or one-quarter econometrics course would not be
expected to cover all, or even any, of the more advanced material in Part 3. A typical introduc-
tory course includes Chapters 1 through 8, which cover the basics of simple and multiple regres-
sion for cross-sectional data. Provided the emphasis is on intuition and interpreting the empirical
examples, the material from the first eight chapters should be accessible to undergraduates in most
economics departments. Most instructors will also want to cover at least parts of the c hapters
on regression analysis with time series data, Chapters 10 and 12, in varying degrees of depth.
In the one-semester course that I teach at Michigan State, I cover Chapter 10 fairly carefully,
give an overview of the material in Chapter 11, and cover the material on serial correlation in
Chapter 12. I find that this basic one-semester course puts students on a solid footing to write
empirical papers, such as a term paper, a senior seminar paper, or a senior thesis. Chapter 9
c ontains more specialized topics that arise in analyzing cross-sectional data, including data
problems such as outliers and nonrandom sampling; for a one-semester course, it can be skipped
without loss of continuity.
The structure of the text makes it ideal for a course with a cross-sectional or policy analysis
focus: the time series chapters can be skipped in lieu of topics from Chapters 9 or 15. The new mate-
rial on potential outcomes added to the first nine chapters should help the instructor craft a course
that provides an introduction to modern policy analysis. Chapter 13 is advanced only in the sense
that it treats two new data structures: independently pooled cross sections and two-period panel data
analysis. Such data structures are especially useful for policy analysis, and the chapter provides

Preface xv
several examples. Students with a good grasp of Chapters 1 through 8 will have little difficulty with
Chapter 13. Chapter 14 covers more advanced panel data methods and would probably be covered
only in a second course. A good way to end a course on cross-sectional methods is to cover the rudi-
ments of instrumental variables estimation in Chapter 15.
I have used selected material in Part 3, including Chapters 13 and 17, in a senior seminar geared
to producing a serious research paper. Along with the basic one-semester course, students who have
been exposed to basic panel data analysis, instrumental variables estimation, and limited dependent
variable models are in a position to read large segments of the applied social sciences literature.
Chapter 17 provides an introduction to the most common limited dependent variable models.
The text is also well suited for an introductory master’s level course, where the emphasis is on
applications rather than on derivations using matrix algebra. Several instructors have used the text to
teach policy analysis at the master’s level. For instructors wanting to present the material in matrix
form, Appendices D and E are self-contained treatments of the matrix algebra and the multiple regres-
sion model in matrix form.
At Michigan State, PhD students in many fields that require data analysis—including accounting,
agricultural economics, development economics, economics of education, finance, international eco-
nomics, labor economics, macroeconomics, political science, and public finance—have found the text
to be a useful bridge between the empirical work that they read and the more theoretical econometrics
they learn at the PhD level.
Suggestions for Designing Your Course Beyond the Basic

I have already commented on the contents of most of the chapters as well as possible outlines for
courses. Here I provide more specific comments about material in chapters that might be covered or
skipped:
Chapter 9 has some interesting examples (such as a wage regression that includes IQ score as
an explanatory variable). The rubric of proxy variables does not have to be formally introduced to
present these kinds of examples, and I typically do so when finishing up cross-sectional analysis. In
Chapter 12, for a one-semester course, I skip the material on serial correlation robust inference for
ordinary least squares as well as dynamic models of heteroskedasticity.
Even in a second course I tend to spend only a little time on Chapter 16, which covers simultane-
ous equations analysis. I have found that instructors differ widely in their opinions on the importance
of teaching simultaneous equations models to undergraduates. Some think this material is funda-
mental; others think it is rarely applicable. My own view is that simultaneous equations models are
overused (see Chapter 16 for a discussion). If one reads applications carefully, omitted variables and
measurement error are much more likely to be the reason one adopts instrumental variables estimation,
and this is why I use omitted variables to motivate instrumental variables estimation in Chapter 15.
Still, simultaneous equations models are indispensable for estimating demand and supply functions,
and they apply in some other important cases as well.
Chapter 17 is the only chapter that considers models inherently nonlinear in their parameters,
and this puts an extra burden on the student. The first material one should cover in this chapter is on
probit and logit models for binary response. My presentation of Tobit models and censored regression
still appears to be novel in introductory texts. I explicitly recognize that the Tobit model is applied to
corner solution outcomes on random samples, while censored regression is applied when the data col-
lection process censors the dependent variable at essentially arbitrary thresholds.
Chapter 18 covers some recent important topics from time series econometrics, including test-
ing for unit roots and cointegration. I cover this material only in a second-semester course at either
the undergraduate or master’s level. A fairly detailed introduction to forecasting is also included in
Chapter 18.

xvi Preface
Chapter 19, which would be added to the syllabus for a course that requires a term paper, is much
more extensive than similar chapters in other texts. It summarizes some of the methods appropriate
for various kinds of problems and data structures, points out potential pitfalls, explains in some detail
how to write a term paper in empirical economics, and includes suggestions for possible projects.
What’s Changed?
I have added new exercises to many chapters, including to the Math Refresher and Advanced
Treatment appendices. Some of the new computer exercises use new data sets, including a data set
on performance of men’s college basketball teams. I have also added more challenging problems that
require derivations.
There are several notable changes to the text. An important organizational change, which should
facilitate a wider variety of teaching tastes, is that the notion of binary, or dummy, explanatory vari-
ables is introduced in Chapter 2. There, it is shown that ordinary least squares estimation leads to a
staple in basic statistics: the difference in means between two subgroups in a population. By introduc-
ing qualitative factors into regression early on, the instructor is able to use a wider variety of empirical
examples from the very beginning.
The early discussion of binary explanatory variables allows for a formal introduction of potential,
or counterfactual, outcomes, which is indispensable in the modern literature on estimating causal
effects. The counterfactual approach to studying causality appears in previous editions, but Chapters 2,
3, 4, and 7 now explicitly include new sections on the modern approach to causal inference. Because
basic policy analysis involves the binary decision to participate in a program or not, a leading example
of using dummy independent variables in simple and multiple regression is to evaluate policy inter-
ventions. At the same time, the new material is incorporated into the text so that instructors not wish-
ing to cover the potential outcomes framework may easily skip the material. Several end-of-chapter
problems concern extensions of the basic potential outcomes framework, which should be valuable
for instructors wishing to cover that material.
Chapter 3 includes a new section on different ways that one can apply multiple regression,
including problems of pure prediction, testing efficient markets, and culminating with a discussion of
estimating treatment or causal effects. I think this section provides a nice way to organize students’
thinking about the scope of multiple regression after they have seen the mechanics of ordinary least
squares (OS) and several examples. As with other new material that touches on causal effects, this
material can be skipped without loss of continuity. A new section in Chapter 7 continues the discussion
of potential outcomes, allowing for nonconstant treatment effects. The material is a nice illustration
of estimating different regression functions for two subgroups from a population. New problems
in this chapter that allow the student more experience in using full regression adjustment to estimate
causal effects.
One notable change to Chapter 9 is a more detailed discussion of using missing data indicators
when data are missing on one or more of the explanatory variables. The assumptions underlying the
method are discussed in more detail than in the previous edition.
Chapter 12 has been reorganized to reflect a more modern treatment of the problem of serial
correlation in the errors of time series regression models. The new structure first covers adjusting the
OLS standard errors to allow general forms of serial correlation. Thus, the chapter outline now paral-
lels that in Chapter 8, with the emphasis in both cases on OLS estimation but making inference robust
to violation of standard assumptions. Correcting for serial correlation using generalized least squares
now comes after OLS and the treatment of testing for serial correlation.
The advanced chapters also include several improvements. Chapter 13 now discusses, at an acces-
sible level, extensions of the standard difference-in-differences setup, allowing for multiple control

Preface xvii
groups, multiple time periods, and even group-specific trends. In addition, the chapter includes a
more detailed discussion of computing standard errors robust to serial correlation when using first-
differencing estimation with panel data.
Chapter 14 now provides more detailed discussions of several important issues in estimating
panel data models by fixed effects, random effects, and correlated random effects (CRE). The CRE
approach with missing data is discussed in more detail, as is how one accounts for general functional
forms, such as squares and interactions, which are covered in the cross-sectional setting in Chapter 6.
An expanded section on general policy analysis with panel data should be useful for courses with an
emphasis on program interventions and policy evaluation.
Chapter 16, which still covers simultaneous equations models, now provides an explicit link
between the potential outcomes framework and specification of simultaneous equations models.
Chapter 17 now includes a discussion of using regression adjustment for estimating causal (treat-
ment) effects when the outcome variable has special features, such as when the outcome itself is a
binary variable. Then, as the reader is asked to explore in a new problem, logit and probit models can
be used to obtain more reliable estimates of average treatment effects by estimating separate models
for each treatment group.
Chapter 18 now provides more details about how one can compute a proper standard error for
a forecast (as opposed to a prediction) interval. This should help the advanced reader understand in
more detail the nature of the uncertainty in the forecast.
About MindTap™
MindTap is an outcome-driven application that propels students from memorization to mastery.
It’s the only platform that gives you complete ownership of your course. With it, you can challenge
every student, build their confidence, and empower them to be unstoppable.
Access Everything You Need In One Place. Cut down on prep with preloaded, organized course
materials in MindTap. Teach more efficiently with interactive multimedia, assignments, quizzes and
more. And give your students the power to read, listen and study on their phones, so they can learn on
their terms.
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insights into student engagement. Identify topics troubling your entire class and instantly communi-
cate with struggling students. And students can track their scores to stay motivated toward their goals.
Together, you can accelerate progress.
Your Course. Your Content. Only MindTap gives you complete control over your course. You
have the flexibility to reorder textbook chapters, add your own notes and embed a variety of content
including OER. Personalize course content to your students’ needs. They can even read your notes,
add their own and highlight key text to aid their progress.
A Dedicated Team, Whenever You Need Them. MindTap isn’t just a tool; it’s backed by a per-
sonalized team eager to support you. Get help setting up your course and tailoring it to your specific
objectives. You’ll be ready to make an impact from day one. And, we’ll be right here to help you and
your students throughout the semester—and beyond.
Design Features
In addition to the didactic material in the chapter, I have included two features to help students
better understand and apply what they are learning. Each chapter contains many numbered examples.
Several of these are case studies drawn from recently published papers. I have used my judgment to
simplify the analysis, hopefully without sacrificing the main point. The “Going Further Questions” in

xviii Preface
the chapter provide students an opportunity to “go further” in learning the material through analysis
or application. Students will find immediate feedback for these questions in the end of the text.
The end-of-chapter problems and computer exercises are heavily oriented toward empirical work,
rather than complicated derivations. The students are asked to reason carefully based on what they
have learned. The computer exercises often expand on the in-text examples. Several exercises use data
sets from published works or similar data sets that are motivated by published research in economics
and other fields.
A pioneering feature of this introductory econometrics text is the extensive glossary. The short
definitions and descriptions are a helpful refresher for students studying for exams or reading empiri-
cal research that uses econometric methods. I have added and updated several entries for the seventh
edition.
Instructional Tools
Cengage offers various supplements for instructors and students who use this book. I would like
to thank the Subject Matter Expert team who worked on these supplements and made teaching and
learning easy.
C. Patrick Scott, Ph.D., Louisiana Tech University (R Videos and Computer exercise reviewer)
Hisham Foad (Aplia Home work reviewer and Glossary)
Kenneth H. Brown, Missouri State University (R Videos creator)
Scott Kostyshak, University of Florida (R Videos reviewer)
Ujwal Kharel (Test Bank and Adaptive Test Prep)
Data Sets—Available in Six Formats

With more than 100 data sets in six different formats, including Stata®, R, EViews®, Minitab®,
Microsoft® Excel, and Text, the instructor has many options for problem sets, examples, and term
projects. Because most of the data sets come from actual research, some are very large. Except for
partial lists of data sets to illustrate the various data structures, the data sets are not reported in the
text. This book is geared to a course where computer work plays an integral role.
Updated Data Sets Handbook

An extensive data description manual is also available online. This manual contains a list of data
sources along with suggestions for ways to use the data sets that are not described in the text. This
unique handbook, created by author Jeffrey M. Wooldridge, lists the source of all data sets for quick
reference and how each might be used. Because the data book contains page numbers, it is easy to
see how the author used the data in the text. Students may want to view the descriptions of each data
set and it can help guide instructors in generating new homework exercises, exam problems, or term
projects. The author also provides suggestions on improving the data sets in this detailed resource that
is available on the book’s companion website at http://login.cengage.com and students can access it
free at www.cengage.com.

Preface xix
Instructor’s Manual with Solutions

REVISED INSTRUCTOR’S MANUAL WITH SOLUTIONS SAVES TIME IN PREPARATION
AND GRADING. The online Instructor’s Manual with solutions contains answers to all exercises in
this edition. Teaching tips provide suggestions for presenting each chapter’s material. The Instructor’s
Manual also contains sources for each of the data files with suggestions for using the data to develop
problem sets, exams, and term papers. The Instructor’s Manual is password-protected and available
for download on the book’s companion website.
Test Bank
Cengage Testing, powered by Cognero® is a flexible, online system that allows you to import,
edit, and manipulate content from the text’s test bank or elsewhere, including your own favorite test
questions; create multiple test versions in an instant; and deliver tests from your LMS, your class-
room, or wherever you want.
PowerPoint Slides
UPDATED POWERPOINT ® SLIDES BRING LECTURES TO LIFE WHILE VISUALLY
CLARIFYING CONCEPTS. Exceptional PowerPoint® presentation slides, created specifically for
this edition, help you create engaging, memorable lectures. The slides are particularly useful for clari-
fying advanced topics in Part 3. You can modify or customize the slides for your specific course.
PowerPoint® slides are available for convenient download on the instructor-only, password-protected
section of the book’s companion website.
Scientific Word Slides

UPDATED SCIENTIFIC WORD® SLIDES REINFORCE TEXT CONCEPTS AND LECTURE
PRESENTATIONS. Created by the text author, this edition’s Scientific Word ® slides reinforce the
book’s presentation slides while highlighting the benefits of Scientific Word®, the application cre-
ated by MacKichan software, Inc. for specifically composing mathematical, scientific and techni-
cal documents using LaTeX typesetting. These slides are based on the author’s actual lectures and
are available for convenient download on the password-protected section of the book’s companion
website.
Student Supplements
Student Solutions Manual
Now your student’s can maximize their study time and further their course success with this dynamic
online resource. This helpful Solutions Manual includes detailed steps and solutions to odd-numbered
problems as well as computer exercises in the text. This supplement is available as a free resource at
www.cengagebrain.com.

xx Preface
Acknowledgments
I would like to thank those who reviewed and provided helpful comments for this and previous
editions of the text:
Erica Johnson, Gonzaga University Steven Cuellar, Sonoma State
University
Mary Ellen Benedict, Bowling Green
State University Yanan Di, Wagner College
Chirok Han, Korea University John Fitzgerald, Bowdoin College
Yan Li, Temple University Philip N. Jefferson, Swarthmore
College
Melissa Tartari, Yale University
Yongsheng Wang, Washington and
Michael Allgrunn, University of Jefferson College
South Dakota
Sheng-Kai Chang, National Taiwan
Gregory Colman, Pace University University
Yoo-Mi Chin, Missouri University of Damayanti Ghosh, Binghamton
Science and Technology University
Arsen Melkumian, Western Illinois Susan Averett, Lafayette College
University
Kevin J. Mumford, Purdue
Kevin J. Murphy, Oakland University
University
Kristine Grimsrud, University of New
Nicolai V. Kuminoff, Arizona State
Mexico
University
Will Melick, Kenyon College
Subarna K. Samanta, The College of
Philip H. Brown, Colby College New Jersey
Argun Saatcioglu, University of Jing Li, South Dakota State
Kansas University
Ken Brown, University of Northern Gary Wagner, University of
Iowa Arkansas–Little Rock
Michael R. Jonas, University of San Kelly Cobourn, Boise State University
Francisco
Timothy Dittmer, Central
Melissa Yeoh, Berry College Washington University
Nikolaos Papanikolaou, SUNY at Daniel Fischmar, Westminster
New Paltz College
Konstantin Golyaev, University of Subha Mani, Fordham University
Minnesota
John Maluccio, Middlebury College
Soren Hauge, Ripon College
James Warner, College of Wooster
Kevin Williams, University of
Christopher Magee, Bucknell
Minnesota
University
Hailong Qian, Saint Louis
University Andrew Ewing, Eckerd College
Rod Hissong, University of Texas at Debra Israel, Indiana State

Arlington University

Preface xxi
Jay Goodliffe, Brigham Young Heather O’Neill, Ursinus College

University
Leslie Papke, Michigan State
Stanley R. Thompson, The Ohio University
State University
Timothy Vogelsang, Michigan State
Michael Robinson, Mount Holyoke University
College
Stephen Woodbury, Michigan State
Ivan Jeliazkov, University of University
California, Irvine
Some of the changes I discussed earlier were driven by comments I received from people on this
list, and I continue to mull over other specific suggestions made by one or more reviewers.
Many students and teaching assistants, too numerous to list, have caught mistakes in earlier
editions or have suggested rewording some paragraphs. I am grateful to them.
As always, it was a pleasure working with the team at Cengage Learning. Michael Parthenakis,
my longtime Product Manager, has learned very well how to guide me with a firm yet gentle hand.
Anita Verma and Ethan Crist quickly mastered the difficult challenges of being the content and sub-
ject matter expert team of a dense, technical textbook. Their careful reading of the manuscript and
fine eye for detail have improved this seventh edition considerably.
This book is dedicated to my family: Leslie, Edmund, and R.G.

About the Author
Jeffrey M. Wooldridge is University Distinguished Professor of Economics at Michigan State

University, where he has taught since 1991. From 1986 to 1991, he was an assistant professor of eco-
nomics at the Massachusetts Institute of Technology. He received his bachelor of arts, with majors in
computer science and economics, from the University of California, Berkeley, in 1982, and received
his doctorate in economics in 1986 from the University of California, San Diego. He has published
more than 60 articles in internationally recognized journals, as well as several book chapters. He
is also the author of Econometric Analysis of Cross Section and Panel Data, second edition. His
awards include an Alfred P. Sloan Research Fellowship, the Plura Scripsit award from Econometric
Theory, the Sir Richard Stone prize from the Journal of Applied Econometrics, and three graduate
teacher-of-the-year awards from MIT. He is a fellow of the Econometric Society and of the Journal
of Econometrics. He is past editor of the Journal of Business and Economic Statistics, and past
econometrics coeditor of Economics Letters. He has served on the editorial boards of Econometric
Theory, the Journal of Economic Literature, the Journal of Econometrics, the Review of Economics
and Statistics, and the Stata Journal. He has also acted as an occasional econometrics consultant for
Arthur Andersen, Charles River Associates, the Washington State Institute for Public Policy, Stratus
Consulting, and Industrial Economics, Incorporated.
xxii

chapter 1
The Nature
of Econometrics
and Economic Data
C
hapter 1 discusses the scope of econometrics and raises general issues that arise in the
application of econometric methods. Section 1-1 provides a brief discussion about the pur-
pose and scope of econometrics and how it fits into economic analysis. Section 1-2 provides
examples of how one can start with an economic theory and build a model that can be estimated
using data. Section 1-3 examines the kinds of data sets that are used in business, economics, and
other social sciences. Section 1-4 provides an intuitive discussion of the difficulties associated with
inferring causality in the social sciences.
1-1 What Is Econometrics?

Imagine that you are hired by your state government to evaluate the effectiveness of a publicly
funded job training program. Suppose this program teaches workers various ways to use computers in
the manufacturing process. The 20-week program offers courses during nonworking hours. Any
hourly manufacturing worker may participate, and enrollment in all or part of the program is volun-
tary. You are to determine what, if any, effect the training program has on each worker’s subsequent
hourly wage.
Now, suppose you work for an investment bank. You are to study the returns on different invest-
ment strategies involving short-term U.S. treasury bills to decide whether they comply with implied
economic theories.
The task of answering such questions may seem daunting at first. At this point, you may only
have a vague idea of the kind of data you would need to collect. By the end of this introductory
econometrics course, you should know how to use econometric methods to formally evaluate a job
training program or to test a simple economic theory.
1
58860_ch01_hr_001-018.indd 1 10/18/18 4:04 PM

2 CHAPTER 1 The Nature of Econometrics and Economic Data
Econometrics is based upon the development of statistical methods for estimating economic
relationships, testing economic theories, and evaluating and implementing government and business
policy. A common application of econometrics is the forecasting of such important macroeconomic
variables as interest rates, inflation rates, and gross domestic product (GDP). Whereas forecasts of
economic indicators are highly visible and often widely published, econometric methods can be used
in economic areas that have nothing to do with macroeconomic forecasting. For example, we will
study the effects of political campaign expenditures on voting outcomes. We will consider the effect
of school spending on student performance in the field of education. In addition, we will learn how to
use econometric methods for forecasting economic time series.
Econometrics has evolved as a separate discipline from mathematical statistics because the for-
mer focuses on the problems inherent in collecting and analyzing nonexperimental economic data.
Nonexperimental data are not accumulated through controlled experiments on individuals, firms,
or segments of the economy. (Nonexperimental data are sometimes called observational data, or
retrospective data, to emphasize the fact that the researcher is a passive collector of the data.)
Experimental data are often collected in laboratory environments in the natural sciences, but
they are more difficult to obtain in the social sciences. Although some social experiments can be
devised, it is often impossible, prohibitively expensive, or morally repugnant to conduct the kinds
of controlled experiments that would be needed to address economic issues. We give some specific
examples of the differences between experimental and nonexperimental data in Section 1-4.
Naturally, econometricians have borrowed from mathematical statisticians whenever possible.
The method of multiple regression analysis is the mainstay in both fields, but its focus and interpreta-
tion can differ markedly. In addition, economists have devised new techniques to deal with the com-
plexities of economic data and to test the predictions of economic theories.
1-2 Steps in Empirical Economic Analysis

Econometric methods are relevant in virtually every branch of applied economics. They come into
play either when we have an economic theory to test or when we have a relationship in mind that has
some importance for business decisions or policy analysis. An empirical analysis uses data to test a
theory or to estimate a relationship.
How does one go about structuring an empirical economic analysis? It may seem obvious, but
it is worth emphasizing that the first step in any empirical analysis is the careful formulation of the
question of interest. The question might deal with testing a certain aspect of an economic theory, or it
might pertain to testing the effects of a government policy. In principle, econometric methods can be
used to answer a wide range of questions.
In some cases, especially those that involve the testing of economic theories, a formal economic
model is constructed. An economic model consists of mathematical equations that describe various
relationships. Economists are well known for their building of models to describe a vast array of
behaviors. For example, in intermediate microeconomics, individual consumption decisions, subject
to a budget constraint, are described by mathematical models. The basic premise underlying these
models is utility maximization. The assumption that individuals make choices to maximize their
well-being, subject to resource constraints, gives us a very powerful framework for creating tractable
economic models and making clear predictions. In the context of consumption decisions, utility maxi-
mization leads to a set of demand equations. In a demand equation, the quantity demanded of each
commodity depends on the price of the goods, the price of substitute and complementary goods, the
consumer’s income, and the individual’s characteristics that affect taste. These equations can form the
basis of an econometric analysis of consumer demand.
Economists have used basic economic tools, such as the utility maximization framework, to
explain behaviors that at first glance may appear to be noneconomic in nature. A classic example is
Becker’s (1968) economic model of criminal behavior.
58860_ch01_hr_001-018.indd 2 10/18/18 4:04 PM

CHAPTER 1 The Nature of Econometrics and Economic Data 3
Example 1.1 Economic Model of Crime

In a seminal article, Nobel Prize winner Gary Becker postulated a utility maximization framework to
describe an individual’s participation in crime. Certain crimes have clear economic rewards, but most
criminal behaviors have costs. The opportunity costs of crime prevent the criminal from participating
in other activities such as legal employment. In addition, there are costs associated with the possibility
of being caught and then, if convicted, the costs associated with incarceration. From Becker’s per-
spective, the decision to undertake illegal activity is one of resource allocation, with the benefits and
costs of competing activities taken into account.
Under general assumptions, we can derive an equation describing the amount of time spent in
criminal activity as a function of various factors. We might represent such a function as
y 5 f 1 x1, x2, x3, x4, x5, x6, x7 2 , [1.1]
where
y 5 hours spent in criminal activities,
x1 5 “wage” for an hour spent in criminal activity,
x2 5 hourly wage in legal employment,
x3 5 income other than from crime or employment,
x4 5 probability of getting caught,
x5 5 probability of being convicted if caught,
x6 5 expected sentence if convicted, and
x7 5 age.
Other factors generally affect a person’s decision to participate in crime, but the list above is rep-
resentative of what might result from a formal economic analysis. As is common in economic theory,
we have not been specific about the function f(.) in (1.1). This function depends on an underlying util-
ity function, which is rarely known. Nevertheless, we can use economic theory—or introspection—to
predict the effect that each variable would have on criminal activity. This is the basis for an econometric
analysis of individual criminal activity.
Formal economic modeling is sometimes the starting point for empirical analysis, but it is more com-
mon to use economic theory less formally, or even to rely entirely on intuition. You may agree that the deter-
minants of criminal behavior appearing in equation (1.1) are reasonable based on common sense; we might
arrive at such an equation directly, without starting from utility maximization. This view has some merit,
although there are cases in which formal derivations provide insights that intuition can overlook.
Next is an example of an equation that we can derive through somewhat informal reasoning.
Example 1.2 Job Training and Worker Productivity

Consider the problem posed at the beginning of Section 1-1. A labor economist would like to examine
the effects of job training on worker productivity. In this case, there is little need for formal economic
theory. Basic economic understanding is sufficient for realizing that factors such as education, experi-
ence, and training affect worker productivity. Also, economists are well aware that workers are paid
commensurate with their productivity. This simple reasoning leads to a model such as
wage 5 f 1 educ, exper, training 2 , [1.2]
where
wage1 5 hourly wage,
educ1 5 years of formal education,
exper1 5 years of workforce experience, and
training15 weeks spent in job training.
Again, other factors generally affect the wage rate, but equation (1.2) captures the essence of the problem.
58860_ch01_hr_001-018.indd 3 10/18/18 4:04 PM

After we specify an economic model, we need to turn it into what we call an econometric model.
Because we will deal with econometric models throughout this text, it is important to know how an
econometric model relates to an economic model. Take equation (1.1) as an example. The form of the
function f(.) must be specified before we can undertake an econometric analysis. A second issue con-
cerning (1.1) is how to deal with variables that cannot reasonably be observed. For example, consider
the wage that a person can earn in criminal activity. In principle, such a quantity is well defined, but it
would be difficult if not impossible to observe this wage for a given individual. Even variables such as
the probability of being arrested cannot realistically be obtained for a given individual, but at least we
can observe relevant arrest statistics and derive a variable that approximates the probability of arrest.
Many other factors affect criminal behavior that we cannot even list, let alone observe, but we must
somehow account for them.
The ambiguities inherent in the economic model of crime are resolved by specifying a particular
econometric model:
crime 5 b0 1 b1wage 1 b2othinc 1 b3 freqarr 1 b4 freqconv
1 b5avgsen 1 b6age 1 u, [1.3]
where
crime 5 some measure of the frequency of criminal activity,
wage 5 the wage that can be earned in legal employment,
othinc 5 the income from other sources (assets, inheritance, and so on),
freqarr 5 the frequency of arrests for prior infractions (to approximate the probability of arrest),
freqconv 5 the frequency of conviction, and
avgsen 5 the average sentence length after conviction.
The choice of these variables is determined by the economic theory as well as data considerations.
The term u contains unobserved factors, such as the wage for criminal activity, moral character, fam-
ily background, and errors in measuring things like criminal activity and the probability of arrest. We
could add family background variables to the model, such as number of siblings, parents’ education,
and so on, but we can never eliminate u entirely. In fact, dealing with this error term or disturbance
term is perhaps the most important component of any econometric analysis.
The constants b0, b1, . . . , b6 are the parameters of the econometric model, and they describe the
directions and strengths of the relationship between crime and the factors used to determine crime in
the model.
A complete econometric model for Example 1.2 might be
wage 5 b0 1 b1educ 1 b2exper 1 b3training 1 u, [1.4]
where the term u contains factors such as “innate ability,” quality of education, family background,
and the myriad other factors that can influence a person’s wage. If we are specifically concerned
about the effects of job training, then b3 is the parameter of interest.
For the most part, econometric analysis begins by specifying an econometric model, without con-
sideration of the details of the model’s creation. We generally follow this approach, largely because
careful derivation of something like the economic model of crime is time consuming and can take us
into some specialized and often difficult areas of economic theory. Economic reasoning will play a
role in our examples, and we will merge any underlying economic theory into the econometric model
specification. In the economic model of crime example, we would start with an econometric model
such as (1.3) and use economic reasoning and common sense as guides for choosing the variables.
Although this approach loses some of the richness of economic analysis, it is commonly and effec-
tively applied by careful researchers.
Once an econometric model such as (1.3) or (1.4) has been specified, various hypotheses of
interest can be stated in terms of the unknown parameters. For example, in equation (1.3), we might
hypothesize that wage, the wage that can be earned in legal employment, has no effect on criminal
behavior. In the context of this particular econometric model, the hypothesis is equivalent to b1 5 0.
58860_ch01_hr_001-018.indd 4 10/18/18 4:04 PM

CHAPTER 1 The Nature of Econometrics and Economic Data 5
An empirical analysis, by definition, requires data. After data on the relevant variables have been
collected, econometric methods are used to estimate the parameters in the econometric model and to
formally test hypotheses of interest. In some cases, the econometric model is used to make predic-
tions in either the testing of a theory or the study of a policy’s impact.
Because data collection is so important in empirical work, Section 1-3 will describe the kinds of
data that we are likely to encounter.
1-3 The Structure of Economic Data

Economic data sets come in a variety of types. Whereas some econometric methods can be applied
with little or no modification to many different kinds of data sets, the special features of some data
sets must be accounted for or should be exploited. We next describe the most important data structures
encountered in applied work.
1-3a Cross-Sectional Data

A cross-sectional data set consists of a sample of individuals, households, firms, cities, states, countries,
or a variety of other units, taken at a given point in time. Sometimes, the data on all units do not cor-
respond to precisely the same time period. For example, several families may be surveyed during
different weeks within a year. In a pure cross-sectional analysis, we would ignore any minor timing
differences in collecting the data. If a set of families was surveyed during different weeks of the same
year, we would still view this as a cross-sectional data set.
An important feature of cross-sectional data is that we can often assume that they have been
obtained by random sampling from the underlying population. For example, if we obtain informa-
tion on wages, education, experience, and other characteristics by randomly drawing 500 people from
the working population, then we have a random sample from the population of all working people.
Random sampling is the sampling scheme covered in introductory statistics courses, and it simplifies
the analysis of cross-sectional data. A review of random sampling is contained in Math Refresher C.
Sometimes, random sampling is not appropriate as an assumption for analyzing cross-sectional
data. For example, suppose we are interested in studying factors that influence the accumulation of
family wealth. We could survey a random sample of families, but some families might refuse to report
their wealth. If, for example, wealthier families are less likely to disclose their wealth, then the result-
ing sample on wealth is not a random sample from the population of all families. This is an illustra-
tion of a sample selection problem, an advanced topic that we will discuss in Chapter 17.
Another violation of random sampling occurs when we sample from units that are large relative to
the population, particularly geographical units. The potential problem in such cases is that the popula-
tion is not large enough to reasonably assume the observations are independent draws. For example,
if we want to explain new business activity across states as a function of wage rates, energy prices,
corporate and property tax rates, services provided, quality of the workforce, and other state charac-
teristics, it is unlikely that business activities in states near one another are independent. It turns out
that the econometric methods that we discuss do work in such situations, but they sometimes need to
be refined. For the most part, we will ignore the intricacies that arise in analyzing such situations and
treat these problems in a random sampling framework, even when it is not technically correct to do so.
Cross-sectional data are widely used in economics and other social sciences. In economics, the
analysis of cross-sectional data is closely aligned with the applied microeconomics fields, such as
labor economics, state and local public finance, industrial organization, urban economics, demogra-
phy, and health economics. Data on individuals, households, firms, and cities at a given point in time
are important for testing microeconomic hypotheses and evaluating economic policies.
The cross-sectional data used for econometric analysis can be represented and stored in comput-
ers. Table 1.1 contains, in abbreviated form, a cross-sectional data set on 526 working individuals
58860_ch01_hr_001-018.indd 5 10/18/18 4:04 PM

Table 1.1 A Cross-Sectional Data Set on Wages and Other Individual Characteristics
obsno wage educ exper female married
1 3.10 11 2 1 0
2 3.24 12 22 1 1
3 3.00 11 2 0 0
4 6.00 8 44 0 1
5 5.30 12 7 0 1
. . . . . .
. . . . . .
. . . . . .
525 11.56 16 5 0 1
526 3.50 14 5 1 0
for the year 1976. (This is a subset of the data in the file WAGE1.) The variables include wage (in
dollars per hour), educ (years of education), exper (years of potential labor force experience), female
(an indicator for gender), and married (marital status). These last two variables are binary (zero-one)
in nature and serve to indicate qualitative features of the individual (the person is female or not; the
person is married or not). We will have much to say about binary variables in Chapter 7 and beyond.
The variable obsno in Table 1.1 is the observation number assigned to each person in the sample.
Unlike the other variables, it is not a characteristic of the individual. All econometrics and statistics
software packages assign an observation number to each data unit. Intuition should tell you that, for
data such as that in Table 1.1, it does not matter which person is labeled as observation 1, which per-
son is called observation 2, and so on. The fact that the ordering of the data does not matter for econo-
metric analysis is a key feature of cross-sectional data sets obtained from random sampling.
Different variables sometimes correspond to different time periods in cross-sectional data sets.
For example, to determine the effects of government policies on long-term economic growth, econo-
mists have studied the relationship between growth in real per capita GDP over a certain period (say,
1960 to 1985) and variables determined in part by government policy in 1960 (government consump-
tion as a percentage of GDP and adult secondary education rates). Such a data set might be repre-
sented as in Table 1.2, which constitutes part of the data set used in the study of cross-country growth
rates by De Long and Summers (1991).
The variable gpcrgdp represents average growth in real per capita GDP over the period 1960
to 1985. The fact that govcons60 (government consumption as a percentage of GDP) and second60
Table 1.2 A Data Set on Economic Growth Rates and Country Characteristics
obsno country gpcrgdp govcons60 second60
1 Argentina 0.89 9 32
2 Austria 3.32 16 50
3 Belgium 2.56 13 69
4 Bolivia 1.24 18 12
. . . . .
. . . . .
. . . . .
61 Zimbabwe 2.30 17 6
58860_ch01_hr_001-018.indd 6 10/18/18 4:04 PM

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closure of the wound may be tried.
ACUTE INTESTINAL INDIGESTION IN THE
HORSE. INTESTINAL TYMPANY.
Definition. Causes: Debility—general and local, and its causes, fermentescible

food, legumes, new grain, paralyzing seeds, musty fodder, defective teeth, jaws and
salivary glands, iced water after grain, verminous embolism, chill. Symptoms:
Anamnesis, colic, gaseous distension, stupor, death, diagnosis from spasmodic
colic. Course: Fatal in two hours, or more. Recovery. Lesions: Distension of bowels
with carburetted hydrogen, carbon dioxide, and nitrogen, redness of intestinal
mucosa, anæmia of abdominal organs, congestion of cutaneous and surface
vessels. Treatment: Stimulants, antiseptics, enemata, chloral hydrate, puncture,
eserine, pilocarpin, friction, massage, exercise, dieting, bitters.
Definition. A gaseous overdistension of the intestines, from

fermentations in the ingesta, but also in part from air that has been
swallowed, and from carbon dioxide exhaled from the blood
circulating in the intestinal mucosa.
Causes. These are to a large extent the same as those of gastric
tympany. General and digestive debility resulting from former
disease, from spare diet, from unsuitable or indigestible food, from
anæmia, from parasites, from hemorrhages, is a potent predisposing
cause.
Weakness of the alimentary canal from catarrh, or other persistent
disease, from impaired innervation, from embolism of the vessels
and imperfect circulation also predisposes, or again the lack of
vermicular movement and of the mingling of the digestive fluids with
the food, leaving the latter in a specially fermentescible condition. As
direct exciting causes may be named:
Very fermentescible food in excess, such as the leguminous
products (beans, peas, vetches, cowpea, alfalfa, sainfoin, clover) in
their green condition. These contain an excess of protein
compounds, which should be mainly digested in the stomach, and if
passed rapidly in large quantity into the intestines, they fail to be
sufficiently acted on by the trypsin, and are specially liable to
fermentation. Very rapidly grown and aqueous grasses are similarly
liable to decomposition.
New grain is specially liable to fermentation the more so that it
sometimes contains a paralyzing agent, which acts like intoxicating
ryegrass. The ripening seeds of many forage plants often act in this
way, (annual and perennial ryegrass, millet, Hungarian grass, chick
vetch, vetches generally). The same has been observed of the leaves
of growing maize, grapevine leaves, and potato plants.
Musty and spoiled fodders of all kinds are very dangerous, the
toxic principles of the fungi and bacterial ferments paralyzing the
sympathetic nervous filaments.
Fodders that are imperfectly masticated and insalivated owing to
defective teeth or diseased jaws or glands are liable to prove hurtful
in a similar way.
A full drink of water and especially of ice cold water after a feed of
grain is one of the most potent factors. The stomach and intestines
are both roused to violent peristaltic action, the undigested food is
washed on into the bowels, and too often the action of the cold
induces congestion and partial paresis, and exposes the undigested
mass to the uncontrolled action of ferments.
Circulatory troubles caused by verminous embolism (see
intestinal congestion) is another very prolific factor. A sudden chill in
an animal that is perspiring and fatigued may precipitate an attack,
by causing a retrocession of blood from the skin to the intestines,
with resulting paresis of their coats.
Symptoms. The condition is usually complicated with gastric
tympany, so that we have a complication of symptoms. The history of
the case is often diagnostic, showing one of the above mentioned
causes, and above all a full drink after a feed of grain, speedily
followed by abdominal pain, gaseous distension of the abdomen,
causing death in two hours or upward. The distension of the
abdomen usually shows more on the right than the left, and the
resonance on percussion is greater. Colics are usually less violent
than in intestinal congestion, and the actions of the animal are less
precipitate or disorderly. He may lie down, roll and rise, but the
constant restless movement, the sitting on the haunches, and the
frequent agonized turning of the nose toward the flank are rarely
shown. The animal is rather dull and prostrate, passing finally into a
stupor, the face is pinched and anxious, the back arched, the head
pendent, the walk slow and unsteady, and respiration and pulse
accelerated. There is no complete intermission of pain, though it is
more acute at one time than another, for some time there is rumbling
in the bowels followed by complete silence, as they are fully
paralyzed, fæces may be passed at first, but this ceases as the floating
colon is emptied and the gaseous distension becomes extreme, and
urination which may take place in the early stages is no longer
effected in the advanced ones. The compression of the thorax causes
severe dyspnœa, accompanied, when the patient is down, by a slight
groan.
Course. In the advanced stages the animal may sink to the ground
oppressed by the shock, poisoned by the carbon dioxide which can
no longer be exhaled through the lungs, and by hydrogen sulphide
and other toxic products of intestinal fermentation. Death may
follow two hours after a hearty meal and is rarely long delayed in
fatal cases.
Improvement may be recognized by the termination of the paresis,
the lessening of the abdominal tension, the return of the rumbling in
the abdomen, the passage of fæces and flatus, and of urine and by
general relief.
Lesions. In case of death the overdistension of the intestines and
abdomen is the most marked lesion, the composition of the gas
varying with the nature of the ingesta and the duration of the illness.
Carburetted hydrogen compounds abound as a rule in the early
stages, while carbon dioxide predominates later. Pinner found 49 per
cent. of carburetted hydrogen, 8 per cent. of carbon dioxide, and 42
per cent. of nitrogen.
The contents of the large intestines are usually in considerable
amount and in an undigested condition. The walls of the distended
bowels are greatly attenuated and may show congestion, petechiæ, or
rupture. Rupture of the diaphragm is not uncommon. Congestion of
the lungs, but especially of the skin and superficial structures of the
body, and of the brain are natural results of the expulsion of blood
from the abdominal cavity.
Treatment. The desiderata are: relief from existing gaseous
tension; arrest of further fermentation; and the restoration of the
vermicular movement of the intestine.
The two first indications may sometimes be successfully met by
stimulants and antiseptics. Formerly, mild cases were successfully
treated by oil of peppermint and oil of turpentine in oil, and a free
use of enemata. A more modern resort is a large (virtually soporific)
dose of chloral hydrate (1 oz.) given in solution. This is at once a
powerful antiferment and an antispasmodic. It is moreover highly
volatile and in the heat of the stomach is readily passed on into the
duodenum and absorbed. Employed early it not only checks the
production of gas, but it relaxes the whole intestinal tract and allows
the free passage of accumulated gas which passes off rapidly per
anum.
But in severe cases the gaseous distension is too great to hope for
relief by such measures and puncture of the cæcum or double colon
is the only hopeful resort. This is made with a small trochar and
cannula not more than ¼ inch in bore, which is inserted at the point
of greatest resonance. The point usually advised, as in the ox, is the
centre of the space circumscribed by the last rib, the ilium and the
transverse processes of the lumbar vertebræ. A better plan is to
percuss and puncture the point where the drumlike resonance is
greatest. The higher the puncture the more promising as the cannula
is less likely to be blocked by the ingesta which accumulates in the
lower part of each viscus. The cannula may be left in place for some
time to keep the bowel flaccid and allow time for the restoration of
its contractile functions. The cannula may be utilized to inject
antiferments (chloral) and peristaltic stimulants (eserine, pilocarpin,
barium chloride). In cases in which puncture is not imperative these
agents may be used hypodermically, eserine 1½ gr., pilocarpin 2 grs.
or barium chloride 7 grs.
Enemata of soapsuds, with or without stimulants prove effective in
emptying the floating colon and soliciting the action of the large
intestines generally and the passage of flatus. Friction of the
abdomen and walking exercise are desirable. After recovery a
restricted diet, laxatives and bitters serve to restore the lost tone of
the alimentary canal.
ACUTE INTESTINAL INDIGESTION WITH
IMPACTION OF THE LARGE INTESTINES IN
THE HORSE.
Definition. Causes: dessication of ingesta in colon, sacculation, constriction at

pelvic flexure, debility, ill health, local peristalsis, diseased teeth, jaws or salivary
apparatus, excess of food, heating grain, hard fibrous indigestible fodder, green
leguminosæ, privation of water, inactivity, verminous aneurisms, tumors,
strictures, obstructions. Symptoms: colics after meals, becoming more severe,
tension and firmness of right side, sitting on haunches, stretching, small, hard, dry
coated stools, obstruction felt on rectal exploration, frequent attempts to urinate,
tympany. Course: six hours to six days or more, signs of aggravation and
improvement. Lesions: large intestines tympanitic, impaction often at pelvic
flexure, or other constriction, adherent mucosa has thick mucus or blood, is
discolored, friable, necrosis, perforation, liquid contents of distended bowel in
front, rupture, invagination, volvulus. Treatment: laxative diet, injections, aloes,
pilocarpin, eserine, barium chloride, chloral hydrate, morphia, henbane,
belladonna, puncture, cold or oleaginous enemata, empty or knead rectum and
colon, cold compress, electricity, friction, laparotomy.
Definition. This is an impaction and obstruction of the colon, and

usually of the pelvic flexure with dried and badly digested alimentary
matters.
Causes. Certain anatomical and physiological conditions
contribute to this disease in the horse. The ingesta as it leaves the
stomach is liquid or pultaceous and throughout the small intestines
it remains so, so that they are little liable to impaction. But by the
time the cæcum is reached much of the liquid has been absorbed,
and as the contents pass into the double colon they are usually a soft
solid, which gradually becomes dried as it advances through the
double and floating colon. The sacculation of cæcum and colon tends
to delay the masses and favors absorption. The pelvic flexure, the
narrowest part of the double colon, is formed by an acute bend of the
viscus on itself so that the dried masses advancing from in front are
especially liable to become arrested and impacted at this point.
Impaction may, however, occur at any part of the large intestine.
Any debility or atony of the intestines predisposes to the condition.
The ingesta accumulates in the portion which does not contract
sufficiently to pass it onward, and this soon becomes distended to a
state of absolute paresis. All conditions of debility, and all prolonged
ill health tend to operate in this way by lessening vermicular
movement.
Again in cases of nausea or intestinal disorder the supervention of
antiperistaltic movements, will tend to accumulate the ingesta at one
point and favor impaction (Ernst).
As in the case of other indigestions the imperfect preparation of
the food is an active factor. Diseased teeth, jaws or salivary glands,
act in this way and a functionally weak stomach contributes to this as
to other intestinal disorders.
An excess of food and especially indigestible food will contribute to
impaction. Heating grain, like corn, wheat, buckwheat, passed
rapidly through the stomach in an imperfectly digested condition,
tends to accumulate in the larger intestines. Hard, fibrous fodders
like hay and straw that have run to seed, or which have been washed
out by rains, bleached or heated, rye-straw, the stalks of beans, peas,
vetches, which have been similarly spoiled, and clover hay affected
with cryptogams or other ferments act in the same way. Even clover
eaten green, produces in foals impactions to which the hairs of the
leaves and chalices materially contribute (Verrier). The allied plants
alfalfa and sainfoin when passed rapidly through the stomach tend to
impaction of the large intestines. But any fibrous, indigestible and
innutritious fodder, taken in excess to make up the deficiency of
nutriment is liable to act in this way.
Other conditions that contribute to impaction are lack of water,
especially at night when much hay is consumed, and lack of exercise
which tends to torpor of both liver and bowels.
Finally verminous aneurisms and embolism of the intestinal
arteries induce congestion, paresis, spasms, and other disorders
which tend to aggregation and impaction. Also tumors, strictures and
obstructions of all kinds tend to impaction.
Symptoms. A certain amount of impaction is not incompatible
with ordinary health, but as this increases all grades of colic may be
met with from the most simple and transient to the most persistent
and severe.
In the milder forms slight and transient colics come on after
meals, for days in succession, before any serious attack is sustained.
These are especially marked under dry bulky fodder (hay), less so on
grain, and less on green food or roots. The animal paws, moves the
hind limbs uneasily, looks at the flanks, he may even kick at the
abdomen, lie down and roll, rise, pass a little manure or flatus, and
seeming relieved may resume feeding, until the next attack. The
intermissions may last a few minutes, a quarter of an hour or longer,
and they gradually become more prolonged until they disappear for
the time. Sooner or later, however, the obstruction becomes more
complete and the colic more severe and persistent. To the ordinary
symptoms of violent abdominal pain there are added symptoms
which point to bowel impaction or obstruction. There is a special
tension of the right side of the abdomen, with flatness on percussion.
When down there is a tendency to sit on the haunches to relieve
pressure on the diaphragm and lungs. When standing there is a
disposition to stretch the fore limbs out forward and the hind ones
backward. Fæces may be passed at first in a few small round balls at
a time, but this soon ceases, and very little or none can be obtained
even by the use of enemas. The straining is usually so violent as to
expel the enemata as soon as introduced. The hand introduced into
the rectum can easily detect the solid impacted pelvic flexure of the
colon pressing backward into the pelvis or impinging on the right
pubis. Another common symptom is the frequent passage of urine in
dribblets, due to the irritation of the bladder by the pressure upon it
of the impacted colon during straining. In cases of this kind the colon
and cæcum become tympanitic as first shown by a resonant
distension of the right flank obliterating the hollow in front of the
ilium, and later by a similar condition of the left flank.
The abdominal pain is usually less acute than in simple spasmodic
colic or intestinal congestion. The face is less pinched and anxious,
the eye less frightened, the kicking at the belly less violent, and the
lying down more deliberate and careful. Very commonly the patient
merely rests on his belly or side without attempting to roll.
Course. The disease may last six to twelve hours, or even as many
days before it ends in recovery or death. The colicy symptoms usually
increase, with the complication of dyspnœa when tympany becomes
well marked, hyperthermia in case of the supervention of enteritis,
and signs of general peritonitis and collapse in case of rupture of the
bowel. A sudden increase of the pain may otherwise indicate the
occurrence of invagination.
As indicating a favorable termination there may be restoration of
the rumbling, the passage of fæces at first perhaps in the form of
solid cylindroid masses, and later as a mixture of broken up ingesta,
liquid and gas, the tension of the abdomen disappears, the pains
lessen and cease, and there is a gradual restoration to health.
Lesions. The abdominal walls are tense and more or less drumlike,
and when these are cut through the large intestines protrude
strongly. When punctured there is a free discharge of gas. The most
common seat of obstruction is the pelvic flexure, but it may occur in
the floating colon, or rectum, in the double colon even at other parts
than its pelvic flexure, in the cæcum or in the ilio-cæcal opening. The
impacted mass is firm, rather dry, covered with mucus and
sometimes blood, and manifestly only partially digested. Its size and
form vary greatly as it is moulded into the affected viscus. The
mucosa in contact with the impacted mass is covered with a thick
layer of viscid mucus sometimes streaked with blood. The mucosa
itself is congested, thickened, friable, and marked with spots or
patches of various colors (white, gray, green,) indicating
commencing necrosis. In old standing cases this may extend to the
other coats of the bowel determining perforation or laceration.
The portion of the bowel immediately in front of the obstruction is
filled with liquid which has been forced down upon the barrier by the
active peristaltic movements, and the distension by liquid and gas
may have increased until rupture has ensued with the escape of the
contents into the peritoneal cavity. Invagination, volvulus and
peritonitis are common.
Treatment. This will vary according to the stage and degree of the
illness. In slight cases with transient colics only after meals, a more
laxative diet may suffice. Boiled flaxseed, roots, potatoes, apples,
green cornstalks, silage, or even sloppy bran mashes, with an
abundance of good water and active exercise may prove efficient.
Copious injections of warm water, soapsuds, or linseed oil emulsion
may be added.
In the more violent cases we must resort to more active measures
and yet drastic purgatives are full of danger. The free secretion from
the vascular small intestines and the active vermicular movements,
lead to the speedy overdistension of the bowel just in front of the
obstruction, the current being strong and active all around the
contracting gut in contact with the mucosa, while a weaker return
current sets in in the centre, but is effectually checked and arrested
at no great distance in front of the impaction by the strong backward
peripheral stream. If therefore the impaction is not broken up, it is
inevitable that the gut above must be more and more distended until
a rupture ensues.
Yet in a certain number of cases a moderate dose of aloes or castor
oil supplemented by frequent enemata and other measures, succeeds
in safely overcoming the obstruction. The solid impacted mass is
gradually softened and removed, and finally after perhaps three or
four days of complete obstruction the fæces begin to pass and
recovery ensues.
With or without the aloes, the hypodermic use of pilocarpin or
eserine or both will often succeed in obtaining successful peristalsis.
Barium chloride while inducing more active peristalsis is, on that
account, somewhat more dangerous.
Pain may be moderated and fermentation checked by chloral
hydrate (½ oz.), or, an anodyne, morphia (2–4 grs.), may be given
hypodermically. In the absence of these, extract of hyoscyamus or
belladonna (2 drs.) may be given by the mouth, and repeated as may
be necessary. If tympany is dangerous use the trochar and cannula.
Enemata and other accessory measures must not be neglected.
W. Williams has resorted to rectal injections of 2 oz. aloes forced
into the rectum by a syringe furnished with a long elastic tube, and
repeated when expelled. Brusasco has used copious liquid injections
poured into a rectal tube the end of which is raised at least ten feet
above the croup, so as to gain the requisite force. Schadrin uses
injections of cold water to stimulate the bowels to contractions.
Injections of oils or mucilaginous matters when they can be carried
far enough lubricate the walls and favor the passage of solid matters.
Castor oil which acts to a large extent locally is especially applicable.
Mechanical applications are often valuable. If the obstruction is
lodged in the rectum or floating colon it can usually be reached by
the oiled hand and carefully extracted. If this is not successful,
impactions in the floating colon or pelvic flexure may still be to a
large extent broken up and loosened by the knuckles of the oiled
hand in the rectum. I have often resorted to this with excellent effect.
Impactions in the cæcum or elsewhere in the double colon are
however inaccessible for such treatment. For these, external
measures are available. Wilhelm wraps the abdomen in cold
compresses. Causse and Lafosse recommend the electric current.
Friction to the skin of the abdomen is a common resort. Rudofsky
turns the animal on his side or his back, to remove the weight of the
small intestines from the impacted cæcum or colon, and favor the
exit by gravitation of the contents from the cæcum into the colon.
Kneading of the abdomen with the fists or knee when in this
recumbent position may also be resorted to.
As a dernier resort, Gaullet performed laparotomy but with no
success as the animal died the following day. The horse was,
however, in extremis at the time of the operation and a portion of the
intestinal wall was blackish and gangrenous. To be successful such
an operation should be practiced before there is any probability of
gangrene, and while the patient is still in good condition for
recuperation. But these are just the cases in which success is to be
hoped for from less dangerous measures. Again the conditions for its
success are best in case of obstruction of the pelvic flexure, as that
could easily be drawn out through a spacious abdominal wound,
incised, emptied and sutured with careful antiseptic precautions, and
with little risk of infection of the peritoneum. But this is just the
point where an obstruction can be efficiently dealt with in a less
dangerous way, by kneading through the rectum for example. The
operation, however, is not one to be utterly condemned, but in any
case in which it is certain that the obstruction is otherwise
irremediable, it should be adopted at as early a stage as possible,
under anæsthesia, and with antiseptic precautions. The after
treatment would consist in a restricted diet of milk or gruel with
antiseptics to prevent fermentation and bloating.
IMPACTION OF THE COLON IN
RUMINANTS.
Causes: Debility, hard, fibrous food, dry winter feeding, privation of water,
astringents, smut, ergot. Symptoms: Hard, moulded, coated dung, blood-streaked,
and in small quantity, tympany, dullness, debility, splashing sound when right
flank is pressed, rectal exploration. Treatment: Laxative food, water, salt,
strychnia, eserine, barium chloride, enemata, oils.
This is not a common affection in cattle, yet it does occur in weak

and debilitated conditions, and in animals fed on fibrous and
innutritious aliments. The ingesta are delayed in the gut, their liquid
portion absorbed and the remainder accumulates in a hard mass,
which distends and weakens the bowel. Dry winter feeding, with a
scarcity of water strongly contributes to its production. Astringent
plants in the hay, or smut or ergot may add to the tendency.
Symptoms. The fæces are hard and firm, glazed on the surface,
coated with mucus and sometimes stained with blood. They are
passed in small quantity and with much effort and straining, and
finally the bowels become completely blocked, nothing whatever
being passed. Tympany of the rumen now appears, especially after
feeding, appetite and rumination fail, there is much dullness,
debility, and loss of flesh and unless relieved, the animal dies in
marasmus. Pressure on the right side of the abdomen made suddenly
and forcibly produces a sound of liquid splashing in an air space,
derived apparently from the accumulation above the obstruction.
The oiled hand introduced into the rectum may feel the solid
impaction, but in any case causes pain and moaning when the seat of
the impaction is pressed upon.
Treatment. In the milder cases and earlier stages a change to
sloppy food, green food, or boiled flaxseed, with plenty of salt, free
access to water, and scruple doses of nux vomica may prove
successful.
In the more advanced conditions with complete obstruction, give
½ lb. to 1 lb. each of sodium chloride, and sodic sulphate, and ½ dr.
nux vomica, inject hypodermically 3 grs. eserine or 7 grains barium
chloride, give water ad libitum, and frequent and large injections of
soapsuds. If these latter are given cold they will still further stimulate
the missing peristalsis. In obstinate cases a second dose of the salts,
or 1 quart of castor oil may be given with the addition of 20 drops of
croton oil.
When relief has been obtained, a laxative and nutritive diet and a
course of bitters should follow.
INDIGESTION WITH OBSTRUCTION OF THE
COLON IN SWINE.
Causes: green leguminosæ, dew, rain, dry indigestible food, lack of water or
exercise, debility, torpid liver. Symptoms: firm, small, coated stools, obstruction,
straining, tympany, rumbling, vomiting, anorexia, lies on belly, secludes himself,
restless, grinding teeth, diarrhœa. Diagnosis from hog cholera. Treatment:
laxatives, enemata, antiferments, rubbing, massage, mechanical unloading of
rectum, puncture, dieting, bitters.
Causes. The leguminosæ in their green state are liable to produce
indigestion and flatulence in the pig. If covered by dew or rain this
tendency is increased. Dry, fibrous or indigestible food with privation
of water and of exercise tends to intestinal impaction. Debility from
any cause, by weakening the contractility and secretory power of the
bowel strongly predisposes to this condition. Torpid liver with
diminished secretion of bile is another common factor.
Symptoms. The defecations are infrequent, and small, and covered
by a mucus film on a glazed surface. This increases steadily until they
cease altogether, when straining, tympany, rumbling and vomiting
follow. The animal refuses food, and lies on its belly, hiding under
the straw when that is available. Restlessness with frequent change
of place and grinding of the teeth are noticed. A spontaneous cure
may take place by a free secretion of liquid in which the impacted
mass is loosened, disintegrated and floated off, the costiveness being
succeeded by diarrhœa. Once established this diarrhœa may become
persistent, causing serious loss of condition, and simulating hog
cholera. It may be distinguished by the fact that it occurred without
the introduction of a contagium, is easily accounted for by the nature
of the food and is not communicated to adjacent herds treated in a
different way. There is also the absence of the petechiæ on the skin,
and, on post mortem, of the specific round necrotic intestinal ulcers
of hog cholera.
Treatment. The first object is to rid the intestines of the irritating
impacted masses, and this may be secured by giving 1 oz. castor oil, 2
drs. jalap, or 3 grs. croton farina to a 150 lb. pig. This may be
seconded by frequent and copious injections of soapsuds. If
fermentation and tympany are troublesome 30 grs. chloral hydrate
may be given and repeated as circumstances demand it. Active
rubbing of the abdomen or kneading of the same will prove useful. If
tympany becomes dangerous the gas may be safely evacuated by
trochar and cannula, the point of puncture being selected by the
clearness of the resonance. When the impaction has reached the
rectum and prevents the use of enemata, it may be extracted with the
oiled fore finger. An injection of sweet oil may then be given and the
finger may be used again and again as the impacted fæces come
within reach. When diarrhœa has set in it may be checked by doses
of 30 to 60 drops of laudanum, and a diet of boiled milk, well boiled
flaxseed or other starchy gruel or mush. A course of bitters with
chalk, bismuth or antiseptics will prove serviceable during
convalescence.
INTESTINAL INDIGESTION IN THE DOG
WITH CONSTIPATION.
Usual seat. Causes: house life, neglect of call to defecate, lack of exercise,
overdistension, atony, watch dogs, over feeding, obesity, ill health, debility, loss of
teeth, paraplegia, spiced and sweet food, matting of hair over anus, tumors round
anus. Symptoms: small, hard, white, glazed stools, straining, no stools, hot, tender,
swollen, bulging anus, abdominal manipulation, dullness, laziness, seeking
seclusion, colics, tender abdomen, stiffness, arched back, drooping head and tail,
vomiting—sometimes feculent, fever. Lesions: impacted mass of hard, gritty
particles, catarrhal congested or necrotic mucosa, and outer coats, perforating
ulcers. Treatment: air, exercise, laxative diet, mechanical extraction, purgatives,
enemata, demulcents, laparotomy, enterrectomy.
In the dog, atony and impaction are common especially in the
rectum, where the fæces are unduly retained in connection with
house life until accumulated and dried. The impaction tends to
extension forward, the new material adding continually to the old,
and the overdistended rectum becoming more and more atonic in
proportion to the increase of the distension.
Causes. The most prominent factor is denial of nature’s call to
defecate, on the part of house dogs trained to habits of cleanliness.
The accumulated mass distends and weakens the rectum, enabling it
to hold more without suffering, making the call of nature less
imperious, and diminishing the power of expulsion. Lack of exercise
usually operates in the same animals, as it also does in watch dogs,
the movements of which are limited by the length of their chains.
Overfeeding contributes, in various ways, by increasing the
amount of feculent matter passed on into the rectum, by hastening
the food through stomach and small intestine imperfectly digested
and therefore in a more irritating condition, and by contributing to
obesity and lack of tone.
In mastiffs, hounds, bull-dogs, etc., which are naturally gluttonous
and swallow animal food in large masses without tearing apart, or
mastication, portions pass into the intestine undigested and tend to
disturb and block the terminal bowel.
Dogs that are out of health, and which lack tone in general have
usually torpid bowels and suffer from delay and impaction of
contents. Hence all chronic and debilitating diseases are liable to
become aggravated by this troublesome complication.
Old dogs with the teeth worn out and the general tone of the
stomach and intestines low are habitual sufferers.
Paralysis of the posterior limbs is usually associated with paresis of
the rectum and accumulation, and various other atonic nervous
disorders act in the same way.
The sympathy between the skin and alimentary tract shows itself
in common disorders, indigestions and catarrh becoming
complicated by skin eruptions acute and chronic, by indigestions and
impactions. To both conditions the nature of the food of house dogs
largely contributes, the habit of eating abundantly at each meal time
of the master, the consumption of highly spiced meats, of sweet
cakes, pastry and puddings, and even the exclusive diet of white
bread or farinaceous and starchy aliment.
In long haired dogs, the matting of these hairs together across the
anus proves a factor by rendering defecation difficult and painful.
The formation of tumors around the anus, or inflammation and
swelling of the anal glands are additional causes.
Symptoms. As in other animals this condition may be chronic,
lasting for a long time without leading to complete obstruction. The
fæces are passed in hard fœtid, whitish masses, often partly divided,
in pellets, dry, and polished on the surface and covered with a film of
mucus, sometimes blood. They are passed at considerable intervals,
slowly and with painful effort and straining.
In the more advanced and violent cases defecation becomes
absolutely impossible, though the animal strains violently and
frequently. The anus and rectum bulge as a rounded swelling and the
congested and bleeding mucous membrane may be exposed, but
nothing is passed. The anus is hot and tender to the touch and the
anal glands swollen. Manipulation of the abdomen between the two
hands can detect the impacted gut extended forward for a
considerable distance, and even implicating the colon. The oiled
finger in the rectum may detect the impacted matter as a
conglomerate mass of gritty materials. If the appetite continues this
becomes all the more extensive. The affected animal is dull, prostrate
and indisposed to exertion, seeking a dark retired place where he can
rest undisturbed curled up into a ball. Sometimes he starts with a
sharp yelp. Especially does he shrink and complain when the belly is
handled. If made to walk, he does so stiffly, hangs head and tail,
arches the back and tucks up the belly. The face and eyes express
severe suffering. Vomiting is a frequent complication, the rejected
matters being often feculent. Colicy pains are indicated by yelping or
moaning, enteritis and peritonitis by hyperthermia and extreme
abdominal tenderness. The acute disease may last from one to two
weeks, and death may be preceded by auto-infection, by nervous
symptoms of various kinds or by enteritis or peritonitis.
Lesions. These may be stated shortly as impaction, catarrh or
necrotic changes of the mucosa, more or less extensive
inflammations of the bowels and peritoneum, perforations, and
congestions of the liver and kidneys.
Treatment. In the milder cases plenty of open air exercise and a
laxative diet may succeed. In the more severe cases it is usually
requisite to unload the rectum mechanically. The dog is laid on a
table, and the oiled finger introduced through the anus, lubricates
the mucosa as far as it can be reached. Then little by little the firm
mass may be disintegrated and removed being steadied by the other
hand applied on the abdomen. The handle of a teaspoon or a special
spoonshaped curette may at times replace the finger to advantage,
but must be used with due judgment, in view of the thinness and
friability of the walls of the gut.
When the gut has been emptied in this way, or in the less severe
cases without this preliminary, purgatives and frequent injections
can be used to advantage. Jalap ½ dr. and calomel 5 grains, or castor
oil ½ oz., or syrup of buckthorn have been usually employed. The
impaction is usually too firm for the transient action of eserine or
pilocarpin. As injections, castor oil, soapsuds, decoctions of flaxseed,
mallow or elm bark may be employed being repeated as often as they
are expelled and supplemented by the mechanical removal of all
solid matters that come within reach.
In cases so extensive as to resist the above measures we can resort
to laparotomy. The incision can be made close and parallel to the
linea alba, the rectum, or floating colon drawn out through the
wound, the other intestines being carefully held back by an assistant,
the gut is then incised longitudinally and its solid contents removed.
The wound is thoroughly cleansed, washed with an antiseptic
(mercuric chloride 1:2000), and sutured with catgut, the mucosa
being carefully turned in and the muscular and peritoneal coats kept
in accurate contact. Finally the abdominal wound is closed by silk
sutures. The patient must be placed for a week or ten days on well
boiled gruels and the rectum frequently emptied by injections of
tepid water.
In case the bowel is found to be necrotic, the gangrenous section
may be excised and the ends brought together by Murphy’s button,
or simply sutured with catgut over a hollow tube of raw potato.

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Chapter 1 The Nature of Econometrics and Economic Data 1

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Answers to Going Further Questions 775

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Jeffrey M. Wooldridge is University Distinguished Professor of Economics at Michigan State

Chapter 1 The Nature of Econometrics and Economic Data 1

Part 1: Regression Analysis with Cross-Sectional Data 19

Part 2: Regression Analysis with Time Series Data 333

Part 3: Advanced Topics 425

Answers to Going Further Questions 775

9-4b Measurement Error in an Explanatory Problems 361