Advanced Econometrics

Assignment 2

Due Date: November 10, 2017, 11.59 pm

Kanika Mahajan
Ashoka University

The question below carries 25 marks. The dataset has been provided in an excel le. It
contains data on health status of individuals along with other characeteristics. Data
dictionary is provided in the le in a separate sheet. Import the data in STATA.

Question
As a researcher you are interested in measuring the eect of smoking on body mass index
of an individual. Consider the below specication:

bmi =b0 + b1 smoke + b2 income + b3 incomesq + b4 age + b5 agesq + b6 f emale+

b7 preg + b8 educa + u

a) (5 marks) Will the OLS estimator of the coecient of smoking in the above specication
be consistent? Provide at least two suitable reasons for your answer. Discuss the likely sign
of the asymptotic bias for each of the reasons, if they were true?
b) (2 marks) Estimate the above model using OLS.
c) (5 marks) The dataset has three potential instruments for smoking - cigarette tax,
involuntary unemployment and separated/divorced status. Which one of these do you
think will satisfy the conditions for instrument relevance and instrument exogeneity?
Provide intuitive reasons for each instrument.
d) (3 marks) Estimate the rst stage regression with 0 smoke0 as the endogenous variable
and all three potential instruments (or the reduced form equation for 0 smoke0 ). Test for the
joint signifcance of all instruments.
e) (5 marks) Estimate the specied model using 2SLS method of estimation, using all of
the three potential instruments. Compare your estimates with those in part b).
f) (5 marks) Do you think the specied model in part e) is correct? If not, estimate the
model you think is valid.