Assignment on Panel Data Analysis

Submitted to Dr. Gour Gobinda Goswami Department of Economics North Sout Univeristy

By Abdullah Al Mamun ID 091-1083-053

We have used ArellanoBond two step estimator to model cigarette demand equation.….t + β3 lnYit + β4 lnPnit + uit ………. The last variable is a proxy for the the casual smuggling effect across state borders. The disturbance term is specified as a two way error component model: uit = μi + λt +vit ……(2) where μi denotes state specific effect and λt denotes a year specific effect.Cigarette Demand Equation with Arellano – Bond Two Step Estimator A dynamic demand model for cigarettes based on panel data from 46 American states has been proposed by Baltagi and Levin (1992)as: lnCit = α + β1lnCi. Cit is real per capita sales of cigarettes by persons of smoking age (14 years and older). Pnit denotes the minimum real price of cigarettes in any neighboring state. Yit is real per capita disposable income.….46) and the subscript t denotes the ith year (t=1. Pit is the average retail price of a pack of cigarettes measured in real terms. We have here balanced dynamic panel data on cigarette demand in US States.30). The time period effects are assumed fixed parameters to be estimated as coefficients of time dummies for each year in the sample.(1) where the subscript I denotes the ith state (i=1. t-1 + β2 lnPi. This is measured in packs of cigarettes per head. Arellano and Bond (1991) argue that additional instruments can be obtained in a dynamic panel data model if one utilizes the orthogonality conditions that exist between lagged values of Cit (the dependent variable in this case) and the disturbances vit . It acts as a substitute price attracting consumers from high-tax states like Massachusetts with 26c per pack to cross over to New Hampshire where the tax is only 12c per pack.

If the state or federal government of US imposes high tax on cigarettes the consumers may stay away from cigarette consumption.0008172 -.0000 0. lags(1) twostep artests(2) Arellano-Bond dynamic panel-data estimation Group variable: USStates Time variable: Year Number of obs Number of groups Obs per group: = = min = avg = max = = = 1288 46 28 28 28 6.4813 = = 45.0507326 .0201923 .66 0.The following table gives the Stata output on two step estimator proposed by Arellano-Bond based on dynamic panel data.020093 -. . 1.0058592 .10e+06 0.000 0.093 and it is significant). . lnreP lnrePn lnreY t _cons Coef.000 0.).3366733 1.0210272 .0584731 [95% Conf.2220682 411 Wald chi2(5) Prob > chi2 z 835.0000 Number of instruments = Two-step results lnreC lnreC L1.0926952 . xtabond lnreC lnreP lnrePn lnreY t. Err.252078 -. This indicates higher the price value lower the cigarette consumption.t Instruments for level equation Standard: _cons .83 -4.80 P>|z| 0.lnreP D.0392488 . The coefficient of cigarette price of neighboring states has significant positive effect on cigarette demand as the above table shows.0514826 .lnrePn D.0622165 -.41 10. estat sargan Sargan test of overidentifying restrictions H0: overidentifying restrictions are valid chi2(405) Prob > chi2 .0019828 .003069 -.0047034 -.41 -3. .2125019 -.000 Std.0012205 .0000 H0: no autocorrelation .680 0.017701 -.1729258 -.000 0.52 -8.1074631 Warning: gmm two-step standard errors are biased. Instruments for differenced equation GMM-type: L(2/. estat abond Arellano-Bond test for zero autocorrelation in first-differenced errors Order 1 2 z -4. robust standard errors are recommended.82061 1. It also reveals that the cigarette consumers in all US states are likely to continue cigarette consumption in future.lnreY D. Whereas own price elasticity is showing negative effect (the estimate is -.70428 Prob > z 0.lnreC Standard: D.1339078 .02.9732 . This tells us the significant effect of lag effect of cigarette consumption. From the above results table (directly copied from STATA) we find that the lagged consumption coefficient estimate is 1.022485 -.000 0. Interval] 1.

The time dummy has no significant effect. The two step Sargan test for over identification does not reject the null. but this could be due to the bad power of this test for N =46 and T =27. The test for first order serial correlation rejects the null of no first order serial correlation.It is not clear why the sign of the coefficient of per capita disposable income is negative.4813). It is obvious that the people having higher disposable income tend to take more cigarette and conversely. . but it doesn’t reject the null that there is no second order serial correlation (p value is .

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