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Accelerated Regression Wooldridge
Accelerated Regression Wooldridge
Accelerated Regression Wooldridge
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Why metrics?
Applied Econometrics: economists use of data to answer
cause-and-effect questions
Consists of disciplined data analysis paired with the machinery of
statistical inference
This class will provide you with the foundations of metrics
Most important foundation: distinction between causality and
correlation
Even with the most advanced metrics methods, it is exceedingly
difficult to achieve causality
Mistakenly interpreting metrics results as causal is one of the easiest
and most dangerous errors one can make
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Identification
People that have more schooling earn more than those with less
schooling
Is this relationship causal?
A defensible model in economics is that human capital (knowledge)
represents an investment in people that employers are often willing to
pay for. Schooling is one way to accumulate human capital
While the observation that those who go to school longer make more
is consistent with the human capital model, there are other
interpretations
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Accountants
63,985
56,599
78,414
Economists
68,690
72,317
21,586
Mean(Total)
65,001
59,992
100,000
You usually only observe the bolded elements, which are the realized
outcomes.
We, as economists, want to know what impact choosing to be an
economist has on economists earnings relative to the counterfactual of
them being accountants.
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Because everyone isex ante identical, you might try to estimate the impact
of being an economist by comparing the observed earnings, or
N = y 1,D =1 y 0,D =0 = 72, 317 63, 985 = 8, 332
This is nave because it has implicitly assumed that
E (Y0 |D = 1) = E (Y0 |D = 0) or that a good estimate of economists
counterfactual accounting earnings is the observed accountants
accounting earnings.
Since we got to observe all potential outcomes in this exercise, we can
calculate what the real gain from becoming economists is for the people
who become economists.
ATET = y 1,D =1 y 0,D =1 = 72, 317 68, 690 = 3, 627
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Finally, you may want to know what the impact would be if we made
everyone become economists. If you used the nave estimator, youd be
implicitly assuming that E (Y1 ) = E (Y1 |D = 1) and
E (Y0 ) = E (Y0 |D = 0). Because the data is made up, we can calculate
the real ATE:
ATE = y 1 y 0 = 59, 992 65, 001 = 5, 009
All three of these parameters are meaningful, and our nave estimator gives
us none of them.
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What is going on here? We need a model to think about this. The model
is
y1i = g1 (xi , ui )
y0i = g0 (xi , ui )
where xi is a vector of observed variables we will call covariates or
observables, and ui is a vector of unobserved variables we call
unobservables
The functions gi () are two unknown functions that depend on D
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Selection on observables is the easier of the two (but hard enough to keep
us occupied for a while). Ordinary Least Squares (OLS) regressions are
one means of trying to account for selection on observables
Selection on unobservables is extremely difficult. This is the problem that
keeps people like me employed. If you take the follow-up to this course,
Multivariate Analysis, youll learn about some of the techniques one can
use to try to deal with selection on unobservables. Fixed effects models,
instrumental variables, and selection models are a few of the more
common methods.
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To make this discussion a bit more concrete, consider two youths (with the
same observables) making the decision to drop out of high school: one
drops out and one sticks it out and completes high school
Suppose that the one who stays in high school has high earnings, does not
get arrested, and gets married. The one that drops out has low earnings,
gets arrested, and never gets married
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Keeping with the dropout story, let D = 0 indicate the student drops out
of high school and let D = 1 indicate that the student finishes high school
There are two possible outcomes for the students: y1 , the outcome if they
finish high school, and y0 , the outcome if they do not finish high school
There are two parameters you might be interested in:
(D = 1) E (y1 |D = 1) E (y0 |D = 1)
(D = 1) E (y1 |D = 0) E (y0 |D = 0)
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