Financial Markets and Human Capital

Tutorial 3

Ernst Maug
University of Mannheim
http://cf.bwl.uni-mannheim.de
ernst.maug@uni-mannheim.de
Secretary: Angelika Wolf-Tobaben
cf.secretary@uni-mannheim.de
Tel: +49 (621) 181-1951
 Question 1

 You are the mayor of T-town. You would like to appraise the impact of a safety law which came into effect at
the beginning of 2022 and aims to strengthen workplace safety in the construction industry.
 The same group of construction firms reported a fatal injury rate (injury rate hereafter) of 4.5 per 100,000
workers in 2021 and 3.0 in 2022.
 Would you immediately conclude a causal link between the safety law and the observed drop in injury rate?
 No.
 What other factors could lead to the same result?
 E.g., unfavorable weather conditions in 2021.

© 2021 Ernst Maug Financial Markets and Human Capital 2

 Question 2

 Imagine you can teleport yourself to another parallel universe, where everything else went on as usual except
that the safety law did not come into effect. In 2022, the injury rate there was 4.0. Would you now conclude a
causal link between the safety law and improved workplace safety?
 Yes. The safety led to a drop in injury rate of 4.0 - 3.0 = 1.0.

© 2021 Ernst Maug Financial Markets and Human Capital 3

 Question 3

 Of course, you cannot teleport yourself to a parallel universe in real life, but you might still find an imperfect
“parallel universe.” 20 kilometers away from T-town, C-town is well-known for its innovation in building
technologies. Due to their proximity, you may assume any social-economic and natural factor that affect one
town would equally affect the other, except that C-town did not see a safety law come into effect. The injury
rate in C-town in 2022 is 2.0, still lower than T-town.
 Would you conclude that the safety law in T-town failed to improve workplace safety?
 No. The fact that the injury rate in T-town remained higher than that in C-town even after the safety law came
into effect indicates that C-town is probably by far more advanced in worker protection practices.
 However, it does not rule out the possibility that the introduction of the safety law improved T-town’s workplace
safety from an even worse situation.

© 2021 Ernst Maug Financial Markets and Human Capital 4

 Question 4

 After further investigation, you learned that the injury rate in C-town in 2021 was 2.5. Estimate the effect of the
safety law on the injury rate in T-town.
 DD = (3.0 – 4.5) – (2.0 – 2.5) = -1.0

© 2021 Ernst Maug Financial Markets and Human Capital 5

 Question 5

 In a standard diff-in-diff analysis you would see in a finance paper, one would run the following regression to
tease out the causal effect of the safety law on injury rate:

 where subscript i denotes town, and t denotes year.

 Dummy variable Treatment equals one if a safety law was ever enacted in town i and zero otherwise.
 Dummy variable After equals one if a safety law is in effect in year t in town i.
 ε denotes the error term, which we ignore hereafter.

 From the lecture you know the coefficient δ tells you the causal effect of the safety law on injury rate.

© 2021 Ernst Maug Financial Markets and Human Capital 6

 Question 5 (Cont‘d)

 We only consider our two towns: T-town and C-town. We now consider four scenarios.
 C-town in 2021. For this case, Treatment=0 and After=0. Calculate α.

© 2021 Ernst Maug Financial Markets and Human Capital 7

 Question 5 (Cont‘d)

 We only consider our two towns: T-town and C-town. We now consider four scenarios.
 C-town in 2021. For this case, Treatment=0 and After=0. Calculate α.

 T-town in 2021. For this case, Treatment=1 and After=0. Calculate γ.

© 2021 Ernst Maug Financial Markets and Human Capital 8

 Question 5 (Cont‘d)

 We only consider our two towns: T-town and C-town. We now consider four scenarios.
 C-town in 2021. For this case, Treatment=0 and After=0. Calculate α.

 T-town in 2021. For this case, Treatment=1 and After=0. Calculate γ.

 C-town in 2022. For this case, Treatment=0 and After=1. Calculate β.

© 2021 Ernst Maug Financial Markets and Human Capital 9

 Question 5 (Cont‘d)

 We only consider our two towns: T-town and C-town. We now consider four scenarios.
 C-town in 2021. For this case, Treatment=0 and After=0. Calculate α.

 T-town in 2021. For this case, Treatment=1 and After=0. Calculate γ.

 C-town in 2022. For this case, Treatment=0 and After=1. Calculate β.

 T-town in 2022. For this case, Treatment=1 and After=1. Calculate δ.

© 2021 Ernst Maug Financial Markets and Human Capital 10

 Numerical example

 Move on to Excel…

© 2021 Ernst Maug Financial Markets and Human Capital 11