MA Econometrics II: Final 2018

Instructor: Bipasha Maity and TF: Partha Bandopadhyay

Ashoka University Spring Semester 2018

May 8, 2018

All questions need to answered. Total points = 60. Time: 2 hours

Endogeneity due to Omitted Variable

Question 1: Total: 15 points

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Consider a partitioned linear regression model: Yi = X1i β1 + X2i β2 + Ui . Here, β1
and β2 are k1 × 1 and k2 × 1 respectively. Let β˜1n denote the OLS estimator of β1 from
the regression of Yi on X1i alone. Assume the following:

(A1) Data are i.i.d.

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(A2) Q11 = E[X1i X1i ] is finite and positive definite.
(A3) E[Ui |X1i , X2i ] = 0
0
(A4) Q12 = E[X1i X2i ] is finite, and Q12 β2 6= 0
(A5) E[Ui2 |X1i , X2i ] = σ 2

(a) Find the probability limit of β˜1n . Is it a consistent estimator of β1 ? Argue clearly
using the WLLN. (5 points)

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(b) Re-write the model as Yi = X1i (β1 + δ) + i , where i = Ui + X2i β2 − X1i δ. Find
δ (a non-random k1 -vector) such that E[X1i i ] = 0. (5 points)

(c) Find E[2i |X1i ]. Is the model in (b) homoscedastic or heteroscedastic? (5 points)

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Panel Data
Question 2: Total: 15 points

For T = 2, consider the standard unobserved effects model yit = xit β+ci +uit ; t = 1, 2.
Let βFˆE and βFˆD denote the fixed effects and first difference estimators, respectively.

(a) Show that the FE and FD estimates are numerically identical. (10 points)

(b) Show that the error variance estimates from the FE and FD methods are numer-
ically identical. (5 points)

Question 3: Total: 20 points

Country X is a federation of different states and each state can formulate legislation
that can restrict/enhance women’s access to reproductive health services, notably abor-
tion. Suppose that out of 20 states, 10 states have implemented restrictions on access
to abortion over a course of different years (so a phase-wise implementation of bans on
abortion); while abortion remains legal in the remaining states. You wish to investigate
the impact of abortion bans on maternal mortality (a woman’s likelihood of dying while
seeking abortion) and women’s use of contraceptives. Suppose such health data are freely
available for multiple years.

(a) Write down an estimation equation that would allow you to estimate the impact
of abortion bans on the aforementioned outcomes using a difference-in-difference estima-
tion strategy (carefully think about the controls you would include). Clearly explain the
notations. (5 points)

(b) Clearly point out the parameter of interest here and provide its interpretation. (5
points)

(c) Can you suggest two checks that you can perform so that your difference-in-
difference estimation can be trusted as identifying the causal effect of abortion bans? (5
points)

(d) Suppose the conjecture is that bans are specifically going to affect the poor as

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they cannot travel to neighbouring states to seek abortion services. Can you write down
an estimation equation where your estimation strategy is a triple-difference one? Clearly
identify the parameter of interest and provide its interpretation. (5 points)

Non-Linear Models
Question 4: Total: 10 points

Suppose that family i chooses annual consumption ci and charitable contributions qi

to solve the problem: maxc,q c + ai qi subject to c + pi q ≤ mi & c, q ≥ 0. Here, mi is
family income of family i, pi is the price of one rupee of charitable contributions where
pi < 1 because of the tax deductability of charitable contributions, and this price differs
across families because of different marginal tax rates and different state tax codes and
ai ≥ 0 determines the marginal utility of charitable contributions. Here, mi and pi are
exogenous to the family.

(a) Find the optimal solutions for qi . Clearly identify the required conditions that
the parameters should satisfy. (5 points)

(b) Define yi = 1 if qi > 0 and yi = 0 otherwise. Suppose ai = exp(zi γ +νi ). Here, zi is

a J-vector of observable family traits and νi is unobservable. Further, νi is independent
of (zi , mi , pi ) and νi /σ has symmetric distribution function G(.) where σ 2 = V ar(νi ).
Find P (yi = 1|zi , mi , pi ). (5 points)

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