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Lab 4 IV Estimation

This document outlines the steps for an econometrics lab exercise estimating a wage equation using various regression techniques. It includes: 1) Estimating an OLS regression of log wages on education and experience variables. 2) Performing a Hausman test to check for omitted variable bias, using parental education as instruments. 3) Running an IV regression to address any bias. 4) Checking the relevance of the instruments using an F-test of their significance in the first-stage regression. 5) Testing for overidentification using the J-test. 6) Calculating the marginal effect of education on wages.

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Ray He
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23 views3 pages

Lab 4 IV Estimation

This document outlines the steps for an econometrics lab exercise estimating a wage equation using various regression techniques. It includes: 1) Estimating an OLS regression of log wages on education and experience variables. 2) Performing a Hausman test to check for omitted variable bias, using parental education as instruments. 3) Running an IV regression to address any bias. 4) Checking the relevance of the instruments using an F-test of their significance in the first-stage regression. 5) Testing for overidentification using the J-test. 6) Calculating the marginal effect of education on wages.

Uploaded by

Ray He
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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EC395 Applied Econometrics Lab 4

Wilfrid Laurier University

Winter 2022

Topics of Today's exercise:


 Hausman Test for Stochastic Regressors
 Instrumental Variable (IV) Estimation
 Testing for Overidentification: J test

1. In this exercise, we want to estimate a wage equation. First, download the lab 4 data
set from our webpage, which contains the following data. Source: Card (1995)

 id person identifier
 nearc2 =1 if near 2 yr college, 1966
 nearc4 =1 if near 4 yr college, 1966
 educ years of schooling, 1976
 age in years
 fatheduc father's schooling
 motheduc mother's schooling
 wage hourly wage in cents, 1976
 enroll =1 if enrolled in school, 1976
 exper age - educ - 6
 lwage log(wage)
 expersq exper^2

and report the summary statistics

2. The model we are trying to estimate is


2
ln (wag e t )=β 0 + β 1 edu c t + β2 expe r t + β 3 expe r t +ut

3. Estimate the model and report the results.

Hausman Test:

Copyright © Wing H. Chan 2022 Wilfrid Laurier University 1


4. We suspect that we have omitted variable bias because we have omitted the
variable ability. Perform a Hausman test using fathers' and mothers' schooling as
the instruments.

Step 1: OLS educ on a constant and the instruments Z's to get the predicted value
^
edu
2
edu ct =α 0 +α 1 fathed ut +α 2 mothed ut + α 3 expe r t +α 4 expe r t + v t

^ and test whether or not the coefficient on educ


Step 2: OLS lwage on all X’s and educ ^
is significantly different from zero.
^ t + ut
ln (wag e t )=β 0 + β 1 edu c t + β2 expe r t + β 3 expe r 2t + β 4 educ
H 0:H1:
df =level of significance=¿
Hausman test=p-value=¿
Decision:

Instrumental Variable (IV) Estimation:

4. Rerun the model in part (a) with IV Estimation and report the results.

Relevance Test:

5. Check instrument relevance: compute first-stage F statistic (Testing for Weak


instruments)
2
edu ct =γ 0 +γ 1 fatheduct + γ 2 motheduc t + γ 3 expe r t +γ 4 expe r t + v t
H 0:H1:
df 1=df 2=level of significance=¿
Relevance F test=p-value=¿
Decision:

Copyright © Wing H. Chan 2022 Wilfrid Laurier University 2


Over-identification J Test:

6. Testing for Overidentification: J test


2 SLS 2
u^ t =γ 0 +γ 1 fatheduct + γ 2 motheduc t +γ 3 expe r t +γ 4 expe r t + v t
H 0:H1:
df =level of significance=¿
2
J test =mF =∼ χ (m−k )critical-value=¿
7. Decision:

8. What is the marginal effect of education on wage rates?

Copyright © Wing H. Chan 2022 Wilfrid Laurier University 3

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