*** Econometrics I - Home Assignment Winter 17/18 ***

* Group members [Name -- stu-Number -- matriculation number]:

*
*
*
clear

use cornwell.dta

*** Problem 1

* regression of model for year 1987 only

regress lcrmrte lprbarr lprbconv lprbpris lavgsen lpolpc if year == 87,

vce(robust)

* prbarr interpretation:
* yes, stastically significant with p-value of 0.000;
* yes, quantitavely relevant, a 1% increase in the probability of being
arrested decreases the crime rate by 0.73% on average, holding everything
else constant

* prbpris interpretation:
* no, not statistically significant with p-value of 0.601 (>> 0.05);
* quantitavely not very relevant (a 1% increase in probability of being
sentenced to prison leads to an on average INcrease in crime rate by
0.13%, ceteris paribus),
* and effect's direction counter-intuitive; but no worries due to
statistical insignificance

*** Problem 2

* regression of previous model, now with wage regressors added

regress lcrmrte lprbarr lprbconv lprbpris lavgsen lpolpc lwcon lwtuc lwtrd
lwfir lwser lwmfg lwfed lwsta lwloc if year == 87, vce(robust)

* wage variables can control for the socioeconomic environment to some

extent; one would assume that in counties with higher wages the crime rate
will be lower

* F-test for joint significance of wage regressors

test lwcon lwtuc lwtrd lwfir lwser lwmfg lwfed lwsta lwloc

* individually the added wage regressors mostly show little statistical

significance,
* but F-test of joint significance yields a p-value of 0.0073 < 0.05, so
the wage regressors are jointly statistically significant,
* this is kind of inconclusive though, as the individual wage regressors
have no consistent positive/negative effect on the crime rate

*** Problem 3

* polpc and prbarr most likely exhibit positive correlation: the

probabilty of being arrested will most likely increase with the number of
police,
* as there are more police around to catch a criminal

* regress lpolpc lprbarr lprbconv lprbpris lavgsen lwcon lwtuc lwtrd lwfir
lwser lwmfg lwfed lwsta lwloc if year == 87, vce(robust)

* this regression of probability of arrest on police per capita (including

control variables) neither indicates statistical significance, nor
quantitative relevance though

*** Problem 4

* mix potentially a good instrument for prbarr, as there are more likely
to be police called to face-to-face crime,
* rather than non-face-to-face crime (like fraud or tax evasion), so a
higher value for mix should correlate positively with prbarr

* taxpc might be a relevant instrument for polpc, as it indicates the

income of the county, but there are contradicting effects:
* there might be a positive correlation, as richer counties have more
money overall, so also more to spend on the policeforce,
* but conversely, there might be a lower demand for police, as rich
counties show a generally lower crime rate and more "peaceful"
socioeconomic environment

*** Problem 5

ivregress 2sls lcrmrte (lprbarr lpolpc = lmix ltaxpc) lprbconv lprbpris

lavgsen lwcon lwtuc lwtrd lwfir lwser lwmfg lwfed lwsta lwloc if year ==
87, vce(robust)

* when instrumented, prbarr loses statistical significance (p-value

increases from 0.000 to 0.200) and becomes quantitatively less relevant
* polpc, when instrumented, gains statistical signifance (p-value
decreases from 0.081 to 0.009) and the quantitative impact increases by a
factor of almost 4
* the whole regression's R2 decreases significantly, from 0.62 (OLS) to
0.43 (IV 2SLS), so the instruments may not be optimal

*** Problem 6

* checking strength of using mix as instrument for prbarr:

* regression of probability of arrest on mix (including control variables)
regress lprbarr lmix lprbconv lprbpris lavgsen lpolpc lwcon lwtuc lwtrd
lwfir lwser lwmfg lwfed lwsta lwloc if year == 87, vce(robust)
test lmix

* this reduced form regression proves the point: regression of the

probability of arrest on mix (including control variables) ...
* ... shows a positive, quantitatively relevant and statistically
significant influence of mix on prbarr, ...
* ... and the rule of thumb dictates that this is a valid instrument, F
statistic of lmix is significantly larger than 10
* the iv regression shows a decrease in statistical significance of prbarr
though, so intrumenting it via mix isn't the best idea
* prbarr is a variable that is most likely somewhat reliably calculable
(ratio of arrests over all reported crime), so no need to proxy it
* R2 of 0.33 OK for instrument

* checking srength of using taxpc as instrument for polpc:

* regression of police per capita on tax per capita (including control
variables)
regress lpolpc ltaxpc lprbarr lprbconv lprbpris lavgsen lwcon lwtuc lwtrd
lwfir lwser lwmfg lwfed lwsta lwloc if year == 87, vce(robust)
test ltaxpc

* this reduced form regression of police per capita on tax per capita
(including control variables) ...
* ... shows a statistically significant influence of taxpc: for a 1%
increase in taxpc there is on average a 0.39% increase in polpc, ceteris
paribus, ...
* ... which argaubly is quantitatively relevant, ...
* ... but by the rule of thumb this is a rather weak instrument with an F
statistic of 7.74 < 10
* this is contradictory with the iv regression before, in which the
instrumented polpc gained significance
* R2 of 0.47 OK for instrument