Your Homework
1.Use the data set “schooling” of Verbeek for the following analyses based on the wage equation
• log(wage76) = b1 + b2 ed76 + b3 exp76 + b4 exp762
• + b5 black + b6 smsa76 + b7 south76 + b8 nearc4 + e
a.Estimate the reduced form for ed76, including daded and momed (i) with and (ii) without nearc4;
assess the validity of the potential instruments; what indicate the correlation coefficients?
b.Estimate the wage equation, using the instruments age, age2, daded, and momed (i) with and (ii)
without nearc4; interpret the results including the test for validity and the Sargan test.
c.Compare the estimates for b2 (i) from the model in b., (ii) from the model with instruments age,
age2, and nearc4, (iii) from the GRETL Instrumental variables (Two-Stage Least Squares …)
procedure, and (iv) with the OLS estimates.
Dec 16, 2011
Hackl,  Econometrics, Lecture 5
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Your Homework, cont’d
2.For the model for consumption and income (slide 13 ff):
a.Show that both yt and xt are endogenous:
– E{yt εi} = E{xt εi} = σε²(1 – β2)-1
b.Derive the reduced form of the model
Dec 16, 2011
Hackl,  Econometrics, Lecture 5
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