Econometrics I

Final Examination Summer Term 2013,

July 26
th
, 2013
Prof. Dr. Winfried Pohlmeier
Department of Economics
University of Konstanz
This exam contains 4 questions on 9 pages (including this title page). You have to
answer all questions within 90 minutes.
There are 60 points on this exam, each question is worth 15 points.
You may answer in English or in German, but please stick to one language.
You may use a calculator and a dictionary. Use or possession of unauthorized ma-
terials will automatically result in the award of 0 points for this examination.
Do your best to write legibly. Exams or parts of exams which cannot be read with
reasonable eort will not be graded.
Answers written on the examination sheets and on the yellow draft paper
will not be graded!
Good luck!
1
Problem 1: Multivariate Regression
In order to study the impact of education and work experience on the wage level,
we consider the data set including the following variables:
Variable name Description
lnwage log of monthly wage
grade {8, 9, 10, 12, 13}, years of education
pexp potential years of work experience
pexp2 potential years of work experience squared
south =1 if employees live in the south (Baden-W urttemb. or Bayern)
north =1 if employees do not live in the south
noqual =1 if occupation does not demand qualication, 0 otherwise
First, we run the following regression and obtain the estimation result given by:

lnwage
i
= 6.6831
(0.1052)
+ 0.1074
(0.0056)
grade
i
+ 0.0310
(0.0060)
pexp
i
0.0005
(0.0001)
pexp2
i
R
2
= 0.2070, SSE = 143.8924, n = 1505 (1)
where standard errors appear in parentheses below the estimated coecients.
a) You want to test the null hypothesis that lnwage is linear in pexp. What test
can be used? Carry out the test at the 5% signicance level. 3 P
b) Another student suggests to test group specic heterogeneity between north
and south by using Chow test and run the regression (1) again for the two
subgroups (south = 1 and north = 1). The estimation result for employees
living in the south is given by:

lnwage
i
= 6.7825
(0.1902)
+ 0.1114
(0.0105)
grade
i
+ 0.0231
(0.0110)
pexp
i
0.0004
(0.0002)
pexp2
i
R
2
= 0.1803, SSE = 43.0866, n = 549 (2)
and the estimation result for employees living in the north is given by:

lnwage
i
= 6.6164
(0.1236)
+ 0.1060
(0.0064)
grade
i
+ 0.0358
(0.0070)
pexp
i
0.0005
(0.0001)
pexp2
i
R
2
= 0.2331, SSE = 77.2632, n = 956 (3)
(i) What are the null and the alternative hypotheses?
(ii) What is the value of the test statistic?
(iii) Find the 5% critical value.
(iv) Do you reject H0? 4 P
c) What is the main assumption of the test in b)? Test it! 3 P
Hint: F
(952,545)
(5%) = 1.1346
2
d) To check if the type of job also has an impact on wages, we include the dummy
variable noqual in our regression and obtain:

lnwage
i
= 6.6800
(0.1045)
+ 0.7514
(0.1599)
noqual + 0.1102
(0.0058)
grade
i
0.0967
(0.0168)
noqual grade
i
+ 0.0314
(0.0058)
pexp
i
0.0001
(0.0005)
pexp2
i
R
2
= 0.2551, SSE = 135.1720, n = 1505 (4)
1. Interpret the coecients on the variables noqual and noqual grade. 2 P
2. You want to test null hypothesis that the variable noqual has no impact on
lnwage. What test can be used? Carry out the test at the 5% signicance
level. 3 P
Hint: Also use the results of equation (4).
3
Problem 2: Blinder-Oaxaca Decomposition
You want to nd out if females perform worse or better than their male counterparts
in university. To nd out the eects that gender has on university students grade,
you analyze a data set containing the following variables:
Variable Description
GPA grade point average (1-4, 4 is best score)
HSIZE size of graduating class in high school
HSIZESQ HSIZE*HSIZE
SAT combined SAT score (US form of Abitur)
FEM dummy variable = 1 if female
HSIZE F = HSIZE*FEM
HSIZESQ F = HSIZESQ*FEM
SAT F = SAT*FEM
You consider two models:
Model 1:
GPA
i
=
0
+
1
FEM
i
+
i
, i = 1, . . . , n (1)
Model 2:
GPA
i
=
0
+
1
FEM
i
+
2
HSIZE
i
+
3
HSIZE F
i
+
4
HSIZESQ
i
(2)

5
HSIZESQ F
i
+
6
SAT
i
+
7
SAT F
i
+
i
, i = 1, . . . , n
a) What is the interpretation of the parameters
1
and
1
? Explain the dierence
in the interpretation. 2 P
b) Does the coecient on FEM in Table 1 on the next page imply that female
students have an higher GPA on average? Explain why or why not! 3 P
c) What is the optimal class size for males? Is your result reasonable? 2 P
d) Derive the Blinder-Oaxaca decomposition with females as the reference group
(i.e. in terms of endowment of females). 3 P
e) Compute the endowment eect and the discrimination eect of the derived
Blinder-Oaxaca decomposition. Interpret your results. 3 P
f) Assume, there exists a program oering free private lessons for females only.
Unfortunately, it is not known which females are taking part in the program.
Why is the Blinder-Oaxaca decomposition as in e) not reasonable in this case?
Explain. 2 P
4
Regression Output for Model 2
Dependent Variable: GPA
Method: OLS
Included Observations: 4137
Variable Coecient Std. Error t-Statistic Prob.
C 0.3704 0.0936 3.9579 0.0001
FEM 0.3711 0.1458 2.5461 0.0109
HSIZE 0.0439 0.0228 1.9289 0.0538
HSIZE F -0.0478 0.0342 -1.3994 0.1618
HSIZESQ -0.0099 0.0031 -3.1693 0.0015
HSIZESQ F 0.0080 0.0047 1.7029 0.0887
SAT 0.0021 8.5510
5
24.5339 0.0000
SAT F -9.1310
5
0.0001 -0.6675 0.5045
R-squared 0.2020 Mean dependant var 2.6527
Adjusted R-squared 0.2006 S.D. dependent var 0.6586
S.E. of regression 0.5889 Akaike info criterion 1.7807
Sum squared resid 1431.798 Schwarz criterion 1.7929
Log likelihood -3675.388 Hannan-Quinn criter. 1.7850
F-statistic 149.2968 Durbin-Watson stat 1.9625
Prob(F-statistic) 0.0000
Table 1: Regression Output
Summary statistics
Variable Total FEMALE=1 FEMALE=0
GPA 2.6527 2.7309 2.5888
HSIZE 2.7997 2.7916 2.8064
HSIZESQ 10.8535 10.8076 10.8909
SAT 1030.33 1006.62 1049.70
Table 2: Summary Statistics
5
Problem 3: Autocorrelation
Consider the regression y
t
= + x
t
+
t
at a monthly frequency t (1 t 100),
x
t
is deterministic. You have given the residual correlogram and residual histogram
of your regression in the following:
Figure 1: Residual Correlogram
Figure 2: Residual Histogram
a) State the full ideal conditions. Which are violated? Which are not violated? 4 P
b) What process are the residuals likely to follow? Write down the process ex-
plicitly. Derive the variance of the residuals 4 P
Hint: You can use that V (
t
) = V (
t1
).
c) What is the correlation between the residuals of June and December? 1 P
d) What are the properties of the OLS estimator given this error term structure? 2 P
e) Consider the regression outputs in Tables 3 and 4 on the next page, perform
a Breusch-Godfrey test. Present the regression the test is based on, the null
and alternative hypothesis, calculate the corresponding test statistic and state
its 1% crititical value. Do you reject the null hypothesis? 4 P
Hint: Be careful which regression output you have to use.
6
Dependent Variable: Y
Method: Least Squares
Variable Coecient Std. Error t-Statistic Prob.
C 0.6287 0.0974 6.4529 0.0000
X 0.6627 0.0936 7.0777 0.0000
RESID(-1) -0.0661 0.0568 -1.1643 0.2472
R-squared 0.3435 Mean dependent var 0.6362
Adjusted R-squared 0.3299 S.D. dependent var 1.1673
S.E. of regression 0.9556 Akaike info criterion 2.7769
Sum squared resid 87.6636 Schwarz criterion 2.8555
Log likelihood -134.4551 F-statistic 25.1199
Durbin-Watson stat 1.6194 Prob(F-statistic) 0.0000
Table 3: Regression Output 1
Dependent Variable: RESID
Method: Least Squares
Variable Coecient Std. Error t-Statistic Prob.
C -0.0008 0.0942 -0.0082 0.9935
X 0.0267 0.0923 0.2897 0.7727
RESID(-1) 0.2115 0.1005 2.1037 0.0380
R-squared 0.0436 Mean dependent var 0.0000
Adjusted R-squared 0.0239 S.D. dependent var 0.9527
S.E. of regression 0.9412 Akaike info criterion 2.7463
Sum squared resid 85.9333 Schwarz criterion 2.8244
Log likelihood -134.3139 F-statistic 2.2128
Durbin-Watson stat 1.9538 Prob(F-statistic) 0.1149
Table 4: Regression Output 2
7
Problem 4: Binary Response
You want to estimate a model which explains which women participate in the labor
market. You have data on the following variables for n = 753 married women, taken
from a study by Mroz (1987). You consider the following Logit model:
PART =1 if woman i participates in the labor market, 0 if not
HBINC log income of woman is husband (in thousands
of dollars)
EDUC education (in years)
EXPER work experience (in years)
EXPER2 work experience squared
KIDSLT6 number of kids younger than six years
PART

i
=
0
+
1
HBINC
i
+
2
EDUC
i
+
3
EXPER
i
+
4
EXPER2
i
+
5
KIDSLT6
i
+
i
, (1)

i
i.i.d.
standard logistic, i = 1, . . . , n, (2)
where
PART
i
=
{
1 if PART

i
0
0 if PART

i
< 0
The cumulative distribution function of the standard logistic distribution is given
by F(z) =
1
1+exp(z)
.
a) Explain why this model is more suitable to analyze binary data than the linear
probability model (name at least 2 reasons). 2 P
b) What is the dierence between this model and the Probit model? 1 P
c) Derive Pr [PART
i
= 1] and write down the log-likelihood function for this
model.
Hint: You may abbreviate the expression
0
+
1
HBINC
i
+
2
EDUC
i
+

3
EXPER
i
+
4
EXPER2
i
+
5
KIDSLT6
i
by writing X

i
. 3 P
d) Suppose that
1
= 0.01. Mark the following statements as either true (T) or
false (F). Always give a suitable reason for your answer. 6 P
1. If HBINC
i
increases, then Pr [PART
i
= 1] decreases.
2. If HBINC
i
increases by one unit, then Pr [PART
i
= 1] decreases by one
percent.
3. If HBINC
i
, and all other regressors stay the same, then Pr [PART
i
= 1]
0.
When estimating the model, you obtain the following output given on the next page:
8
Dep. Variable: PART
Included obs: 753
Variable Coecient Std. Error z-Statistic Prob.
C -1.9324 0.2958 -6.5320 0.0000
HBINC -0.0174 0.0047 -3.6619 0.0003
EDUC 0.1443 0.0245 5.8907 0.0000
EXPER 0.1193 0.0182 6.5680 0.0000
EXPER2 -0.0024 0.0006 -4.1456 0.0000
KIDSLT6 -0.5352 0.1028 -5.2043 0.0000
Table 5: Logit Regression Output
e) Suppose a woman has 14 years of education and 2 years of experience in the
labor market. Her husband earns 25000 US dollars per year, and she has a
4-year old son. According to this model, compute the probability that the
woman participates in the labor market. 3 P
9