Introduction to Econometrics
Home assigment # 3
(To be submitted by Tuesday, December 14, 00:00 a.m.)
1. For this exercise, use the data in fertil.gdt file. It contains information about a sample
of women in Botswana: their education (variable educ), their age (variable age), and
the number of children they have (variable children).
(a) Estimate the model
children = β0 + β1educ + ε ,
interpret the coefficient β1.
(b) Conduct the Breusch-Pagan test for heteroskedasticity. Does its result justify
the use of robust standard errors? If yes, reestimate the model using these
robust standard errors and comment on the difference with respect to the model
estimated by simple OLS.
(c) Redefine the model as
children = β0 + β1educ + β2age + β3age2
+ ε
and estimate it.
i. Does age have a significant impact on number of children of Botswana
women? State the hypothesis, and compute the test statistics by hand.
Interpret the results and compare it to the results of the test in Gretl.
ii. Do you find justification for the inclusion of age in quadratic form? [Hint:
State the four specification criteria and argue if they are satisfied for the
quadratic in age.]
iii. How does the coefficient β1 change when compared to part (a)? Does this
signal any bias in the model from part (a)? Where does it come from?
Explain the sign of this bias.
(d) Do you think the coefficient β1 from the model in part (c) may suffer from some
omitted variable bias? What variable(s) could be missing in the model and how
would the coefficient β1 change if they were included in the regression? (What
is the sign of the potential bias in coefficient β1?)
(e) Conduct the RESET test of the model from part (c) and interpret the results.
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2. The aim of this exercise is to utilize Econometric tools learned in classes and to analyze
published peer-reviewed papers. You do not need to read all papers thoroughly,
rather you have to understand what the main idea of the paper(s) are, which conclusions
these papers lay down, and which type of methodological caveats are present.
More detailed instructions are below.
Read AER 2001 paper ”The Colonial Origins of Comparative Development: An Empirical
Investigation” (Acemoglu, Johnson, Robinson, 2001) and answer the following
questions:
• What is the econometric model that the paper investigates? Carry out the
corresponding equation.
• That is, what is the outcome/dependent variable and what is the main independent
variable?
• Why is it difficult to estimate the model using a simple OLS method?
• How does the paper resolve the endogeneity problem? What are the assumptions
that the proposed instrument should satisfy?
• How does the paper argues that the exclusion restriction is satisfied?
Now, read AER 2012 comment ”The Colonial Origins of Comparative Development:
An Empirical Investigation: Comment.” What are the main argument(s) that Albouy
(2012) develops to undermine the conclusions of Acemoglu, Johnson, Robinson
(2001)?
Finally, read Acemoglu, Johnson, Robinson (2012) ”The Colonial Origins of Comparative
Development: An Empirical Investigation: Reply.” How did the authors
claim that their findings were robust to Albouy (2012) critique?
(Bonus) Develop your own argument. Are you convinced by the claims/critique
provided by the author(s)? Try to explain your reasoning.
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