ECON2206 Tutorial 10: Week 11

Shang Wu
shang.wu@unsw.edu.au
School of Economics
University of New South Wales

Outline

Review questions

Week 11 problems

Review questions

Q: Can RESET be used to test for Omitted Variable?

A: Yes but only to the higher order term of the current
regressors. For example, test if exper 2 is an omitted variable in
the model log (wage ) = 0 + 1 educ + 2 exper + .
Q: What is functional form mis-specication? Major
consequence?
A: It is a misspecied model with a wrong functional form for
explanatory variables. For example, a log-wage model on age
is mis-specied if the partial eect of age on log wage is
upside-down-U shaped.
In linear regression models, the functional form
misspecication can be viewed as the omission of a nonlinear
function of the explanatory variables. Hence the consequences
of OVB apply and the major one is estimation bias.
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Review questions

Q: What is exogenous, and endogenous sample selection?

A: The exogenous sample selection is a nonrandom sampling
scheme in which a sample is chosen on the basis of the
explanatory variables. It is easily seen that such sampling
scheme does not violate MLR1,3,4 and hence does not
introduce bias in the OLS estimation.
On the other hand, the endogenous sample selection scheme
selects a sample on the basis of the dependent variable and
causes bias in the OLS estimation.

Outline

Review questions

Week 11 problems

Problem 1: 9.1

For the following estimated model

log (salary ) = 0 + 1 log (sales ) + 2 log (mktval ) + 3 profmarg +
4 ceoten + 5 comten +
The R 2 is .353 (n = 177). When ceoten2 and comten2 are added,
R 2 =.375. Is there evidence of functional form misspecication in
this model?
There is misspecication if ceoten2 6= 0 or comten2 6= 0. Test
the joint signicance of ceoten2 and comten2 , using F test:
F=

(.375 .353)/2
= 2.97.
(1 .375)/(177 8)

F2,,10% = 2.3 and F2,,5% = 3. Thus the p -value is slightly

above 0.05, marginally signicant.
A evidence of functional form misspecication.
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Problem 2: 9.3

Study the model:

math10 = 0 + 1 log (expend ) + 2 log (enroll ) + 3 poverty +
where math10 is the % of students passing a math course; poverty
is the % of students living in poverty.
(i) The variable lnchprg is the % of students eligible for the
federally funded school lunch program. Why is this a sensible
proxy for poverty ?
Eligibility for the federally funded school lunch program is very
tightly linked to being economically disadvantaged.
Therefore, the percentage of students eligible for the lunch
program is very similar to the percentage of students living in
poverty

Problem 2: 9.3 continued

Table:

Estimation results (incomplete)

Regressors

Model (1)

Model (2)

log(expend )

11.13
(3.3)
-

7.75
(3.04)
-0.324
(0.036)

lnchprg

(ii) Why the coecient of log(expend ) is lower in Model (2)?

OVB in model (1) lnchprg is omitted, signicant and

negatively correlated with log(expend ) (from intuition: school
districts with poorer children spend, on average, less on
schools.) 1,(1) = 1,(2) + lnchprg lnchprg where lnchprg is the
regression of lnchprg on log(expend ), negative, and lnchprg is
negative as well. Thus, 1,(1) > 1,(2)

Problem 2: 9.3 continued

Table:

Estimation results (incomplete)

Regressors

log(enroll )
lnchprg
R2

Model (1)

Model (2)

0.022
(0.615)
0.0297

-1.26
(0.58)
-0.324
(0.036)
0.1893

(iii) Lower pass rate in larger schools, ceteris paribus?

Once we control for lnchprg, 2,(2) < 0 and has a

t-stat=1.26/0.58 2.17. Signicant at the 5%. The
interpretation is that 100% increase in enrolment leads to 1.26
drop in the pass rate of this math course.
(iv) Interpret lnchprg
Units of math10 and lnchprg are percentage points. Ceteris
paribus, 1 percentage point in lnchprg rate leads to about a
.324 percentage point in the pass rate of math.

Problem 2: 9.3 continued

Table:

Estimation results (incomplete)

Regressors

log(enroll )
lnchprg
R2

Model (1)

Model (2)

0.022
(0.615)
0.0297

-1.26
(0.58)
-0.324
(0.036)
0.1893

(v) What is the implication of the in R 2 from (1) to (2)?

In (1), very little (less than 3%) of the variation in math pass
rates is explained. In (2), we are explaining almost 19%.
Clearly most of the variation in math10 is explained by
variation in lnchprg . This is a common nding in studies of
school performance: family income (or related factors) are
much more important in explaining student performance than
are spending per student or other school characteristics.

Problem 3: 9.5

In example 4.4, log (crime ) = 0 + 1 log (enroll ) +

When studying the relationship between the number of campus
crimes to student enrolment, the sample is not random because lots
of schools did not report crimes. Is this an exogenous sample
selection?
The sample selection in this case is arguably endogenous.
Because prospective students may look at campus crime as
one factor in deciding where to attend college (reverse
causality, endogeneity), colleges with high crime rates have
an incentive not to report crime statistics.
If this is the case, then the chance of appearing in the sample
is negatively related to in the crime equation. (For a given
school size, higher means more crime, and therefore a
smaller probability that the school reports its crime gures.)
Selection on the dependent variable leads to bias.
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Problem 4: C9.3

Data: JTRAIN.dta.
(i) For log (scrap ) = 0 + 1 grant 88 + , where scrap is the
rm scrap rate and grant is a dummy indicating whether a
rm received a training grant. Any reasons why might be
correlated with grant ?

If the grants were awarded to rms based on rm or worker

characteristics, such as size/productivity, grant could easily be
correlated with such factors that are contained in u.

(ii) Estimate the model using data for 1988. Does receiving a
grant lower scrap rate?

log (scrap
[ ) = .409 + .057grant 88, n=54, R 2 =.0004
(.241) (.406)

1 > 0 though not signicant No, it doesn't.

(iii) How does adding a regressor log(scrap87 ) change 1 ?

Interpret 1 . Signicant against H1 : 1 < 0?

log (scrap
[ ) = .021 .254grant + .831log (scrap 87),
(.089)
(.147) (.044) n=54, R 2 =.873

t-stat is -.254/.147 1.73 < (or > in absolute value)

Having grant scrap
rate by 25.4%.

t40,5% = 1.68 for one side test.

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Problem 4: C9.3 continued

(iv) Test H0 : log (scrap87 ) = 1. Report p -value.

test lscrap87 = 1.

The t-stat is (.831 1)/.044 3.84,

which is a strong rejection of H0 .

(v) Repeat parts (iii) and (iv) using hetero-robust s.e., report
any notable dierences.

With the hetero-robust s.e., the t-stat for grant 88 is

.254/.142 1.79, so the coecient is even more
signicantly less than zero. The t-stat for H0 : log (scrap87 ) = 1
is (.831 1)/.071 2.38, which is notably smaller than
before, but it is still pretty signicant.

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