Real Econometrics: The Right Tools to Answer Important Questions 2nd Edition

656 Pages·2·15.861 MB·English

by  Michael A. Bailey

Real
Econometrics
The Right Tools to Answer
Important Questions

Real
Econometrics
The Right Tools to Answer
Important Questions
SecondEdition
Michael A. Bailey
NewYork Oxford
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LibraryofCongressCataloging-in-PublicationData
Names:Bailey,MichaelA.,1969-author.
Title:Realeconometrics:therighttoolstoanswerimportantquestions/
MichaelA.Bailey.
Description:SecondEdition.|NewYork:OxfordUniversityPress,[2019]|
Revisededitionoftheauthor’sRealeconometrics,[2017]|Includes
bibliographicalreferencesandindex.
Identifiers:LCCN2018046855(print)|LCCN2018051766(ebook)|ISBN
9780190857486(ebook)|ISBN9780190857462(pbk.)|ISBN9780190857523
(looseleaf)
Subjects:LCSH:Econometrics–Textbooks.|Economics–Studyandteaching.
Classification:LCCHB139(ebook)|LCCHB139.B3442019(print)|DDC
330.01/5195–dc23
LCrecordavailableathttps://lccn.loc.gov/2018046855
Printingnumber:9 8 7 6 5 4 3 2 1
PrintedintheUnitedStatesofAmerica
CONTENTS
ListofFigures xii
ListofTables xvii
UsefulCommandsforStata xxii
UsefulCommandsforR xxiv
PrefaceforStudents:HowThisBookCanHelpYouLearnEconometrics xxvi
PrefaceforInstructors:HowtoHelpYourStudentsLearnEconometrics xxx
Acknowledgments xxxvi
1 The Quest for Causality 1
1.1 TheCoreModel 2
1.2 TwoMajorChallenges:RandomnessandEndogeneity 7
CASESTUDY:FluShots 13
CASESTUDY:CountryMusicandSuicide 15
1.3 RandomizedExperimentsastheGoldStandard 18
.
Conclusion 22 KeyTerms 23
2 Stats in the Wild: Good Data Practices 24
2.1 KnowOurData 26
2.2 Replication 28
CASESTUDY:ViolentCrimeintheUnitedStates 31
2.3 StatisticalSoftware 32
. . .
Conclusion 33 FurtherReading 34 KeyTerms 34 Computing
.
Corner 34 Exercises 39
I THE OLS FRAMEWORK 43
3 Bivariate OLS: The Foundation of Econometric Analysis 45
3.1 BivariateRegressionModel 47
3.2 RandomVariationinCoefficientEstimates 53
v
vi CONTENTS
3.3 EndogeneityandBias 57
3.4 PrecisionofEstimates 61
3.5 ProbabilityLimitsandConsistency 65
3.6 SolvableProblems:HeteroscedasticityandCorrelatedErrors 67
3.7 GoodnessofFit 70
CASESTUDY:HeightandWages 74
3.8 Outliers 77
. . .
Conclusion 80 FurtherReading 81 KeyTerms 82 Computing
.
Corner 82 Exercises 86
4 Hypothesis Testing and Interval Estimation:
Answering Research Questions 91
4.1 HypothesisTesting 92
4.2 tTests 98
4.3 pValues 106
4.4 Power 109
4.5 StraightTalkaboutHypothesisTesting 115
4.6 ConfidenceIntervals 117
. .
Conclusion 120 FurtherReading 120 KeyTerms 121
. .
ComputingCorner 121 Exercises 123
5 Multivariate OLS: Where the Action Is 127
5.1 UsingMultivariateOLStoFightEndogeneity 129
5.2 OmittedVariableBias 137
CASESTUDY:DoesEducationSupportEconomicGrowth? 140
5.3 MeasurementError 143
5.4 PrecisionandGoodnessofFit 146
CASESTUDY:InstitutionsandHumanRights 152
5.5 StandardizedCoefficients 155
5.6 HypothesisTestingaboutMultipleCoefficients 158
CASESTUDY:ComparingEffectsofHeightMeasures 164
. .
Conclusion 166 FurtherReading 168 KeyTerms 168
. .
ComputingCorner 168 Exercises 172
6 Dummy Variables: Smarter than You Think 179
6.1 UsingBivariateOLStoAssessDifferenceofMeans 180
CASESTUDY:SexDifferencesinHeights 187
CONTENTS vii
6.2 DummyIndependentVariablesinMultivariateOLS 190
6.3 TransformingCategoricalVariablestoMultipleDummyVariables 193
CASESTUDY:WhenDoCountriesTaxWealth? 197
6.4 InteractionVariables 202
CASESTUDY:EnergyEfficiency 207
. .
Conclusion 211 FurtherReading 212 KeyTerms 212
. .
ComputingCorner 212 Exercises 214
7 Specifying Models 220
7.1 QuadraticandPolynomialModels 221
CASESTUDY:GlobalWarming 227
7.2 LoggedVariables 230
7.3 Post-TreatmentVariables 236
7.4 ModelSpecification 243
. .
Conclusion 245 FurtherReading 245 KeyTerms 246
. .
ComputingCorner 246 Exercises 247
II THE CONTEMPORARY ECONOMETRIC TOOLKIT 253
8 Using Fixed Effects Models to Fight Endogeneity
in Panel Data and Difference-in-Difference Models 255
8.1 TheProblemwithPooling 256
8.2 FixedEffectsModels 261
8.3 WorkingwithFixedEffectsModels 267
8.4 Two-WayFixedEffectsModel 271
CASESTUDY:TradeandAlliances 274
8.5 Difference-in-Difference 276
. .
Conclusion 282 FurtherReading 283 KeyTerms 284
. .
ComputingCorner 284 Exercises 288
9 Instrumental Variables: Using Exogenous Variation
to Fight Endogeneity 295
9.1 2SLSExample 296
9.2 Two-StageLeastSquares(2SLS) 298
CASESTUDY:EmergencyCareforNewborns 305
9.3 MultipleInstruments 309
viii CONTENTS
9.4 QuasiandWeakInstruments 310
9.5 Precisionof2SLS 313
9.6 SimultaneousEquationModels 315
CASESTUDY:SupplyandDemandCurvesfortheChickenMarket 319
. .
Conclusion 323 FurtherReading 324 KeyTerms 325
. .
ComputingCorner 325 Exercises 327
10 Experiments: Dealing with Real-World Challenges 333
10.1 RandomizationandBalance 335
CASESTUDY:DevelopmentAidandBalancing 338
10.2 ComplianceandIntention-to-TreatModels 340
10.3 Using2SLStoDealwithNon-compliance 346
CASESTUDY:MinneapolisDomesticViolenceExperiment 350
10.4 Attrition 354
CASESTUDY:HealthInsuranceandAttrition 357
10.5 NaturalExperiments 360
CASESTUDY:CrimeandTerrorAlerts 362
. .
Conclusion 363 FurtherReading 365 KeyTerms 365
. .
ComputingCorner 365 Exercises 366
11 Regression Discontinuity: Looking for Jumps in Data 373
11.1 BasicRDModel 375
11.2 MoreFlexibleRDModels 380
11.3 WindowsandBins 386
CASESTUDY:UniversalPrekindergarten 389
11.4 LimitationsandDiagnostics 391
CASESTUDY:AlcoholandGrades 395
. .
Conclusion 397 FurtherReading 398 KeyTerms 398
. .
ComputingCorner 399 Exercises 400
III LIMITED DEPENDENT VARIABLES 407
12 Dummy Dependent Variables 409
12.1 LinearProbabilityModel 410
CONTENTS ix
12.2 UsingLatentVariablestoExplainObservedVariables 414
12.3 ProbitandLogitModels 418
12.4 Estimation 423
12.5 InterpretingProbitandLogitCoefficients 426
CASESTUDY:EconometricsintheGroceryStore 431
12.6 HypothesisTestingaboutMultipleCoefficients 436
CASESTUDY:CivilWars 440
. .
Conclusion 443 FurtherReading 443 KeyTerms 444
. .
ComputingCorner 444 Exercises 449
IV ADVANCED MATERIAL 457
13 Time Series: Dealing with Stickiness over Time 459
13.1 ModelingAutocorrelation 460
13.2 DetectingAutocorrelation 463
13.3 FixingAutocorrelation 467
CASESTUDY:UsinganAR(1)ModeltoStudyGlobalTemperature
Changes 471
13.4 DynamicModels 473
13.5 Stationarity 476
CASESTUDY:DynamicModelofGlobalTemperature 482
. .
Conclusion 486 FurtherReading 487 KeyTerms 488
. .
ComputingCorner 488 Exercises 490
14 Advanced OLS 493
14.1 HowtoDerivetheOLSEstimatorandProveUnbiasedness 493
14.2 HowtoDerivetheEquationfortheVarianceofβˆ 499
1
14.3 CalculatingPower 501
14.4 HowtoDerivetheOmittedVariableBiasConditions 502
14.5 AnticipatingtheSignofOmittedVariableBias 505
14.6 OmittedVariableBiaswithMultipleVariables 507
14.7 OmittedVariableBiasduetoMeasurementError 508
x CONTENTS
14.8 ColliderBiaswithPost-TreatmentVariables 510
. .
Conclusion 513 FurtherReading 514 KeyTerm 514
. .
ComputingCorner 514 Exercises 515
15 Advanced Panel Data 518
15.1 PanelDataModelswithSeriallyCorrelatedErrors 518
15.2 TemporalDependencewithaLaggedDependentVariable 520
15.3 RandomEffectsModels 524
. .
Conclusion 526 FurtherReading 526 KeyTerm 527
. .
ComputingCorner 527 Exercises 530
16 Conclusion: How to Be an Econometric Realist 533
FurtherReading 537
APPENDICES
Math and Probability Background 538
A Summation 538
B Expectation 538
C Variance 539
D Covariance 540
E Correlation 541
F ProbabilityDensityFunctions 541
G NormalDistributions 543
H OtherUsefulDistributions 549
I Sampling 551
. .
FurtherReading 554 KeyTerms 554 ComputingCorner 554
Citations and Additional Notes 556
Guide to Review Questions 567