MSc in Economics, UB. Econometrics 2. Control Lessons 4 & 5.

Surname: GREHL
Name: MIRIAM

To analyse the effect of economic growth on civil conflict, we specify the following
model:
conflict it =β 0+ β1 growth it + ε it (1)

where conflict it is the indicator of civil conflict based on at least 25 deaths

(any_prio) for country i in period t, and growthit is the rate of growth of GDP
(gdp_g) for country i in period t. ε it is a random error term.

The dataset that includes these variables for 41 sub-Saharan African countries
used in Miguel et al (2004) is in the Stata data file Miguel_et_al_for_control.dta

1) Estimate the impact of economic growth on conflict using the OLS estimator
and discuss (briefly) the problem of omitted variable bias (OVB). (0.5 point)

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2) Re-estimate the specification by OLS controlling for a set of observed country

characteristics:

conflict it =β 0+ β1 growthit + X ' it γ + ε it (2)

where Xit is a vector of other covariates that includes GDP per in 1979 (y_0), a
measure of democracy (polity2l), ethnic (ethfrac) and religious (relfrac)
fractionalization, a dummy variable for oil exporters (Oil), the log of the
proportion of the country that is mountainous (lmtnest), log of total country
population (lpopl1), an country-specific time trends (Iccyear1 to Iccyear41).
 Compare the results with the ones in 1). Does the results confirm the existence
of OVB in the OLS estimates of the specification in equation (1)? (0.5 point)

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3) Without using the commands ivregress and ivreg2, compute the IV-2SLS of
the coefficient 1 in equation (2) using Z1=[1 GPCP_git-1 Xit], where GPCP_git-1 is
growth in rainfall in country i in period t-1 (GPCP_g_l). Compare the result
with those from the OLS estimator (1 point)

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a. Analyse the correlation between economic growth and the annual

variation in rainfall in t-1 (GPCP_g_l) when you control by the regressors
in X. Based on this correlation, assess the properties of the IV-2SLS
estimator that uses Z1? (1/2 point)

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b. Can you obtain any statistical evidence supporting the exogeneity of the
instrument GPCP_g_l? Provide details. (1/2 point)

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4) Compute the IV-2SLS estimation of equation (2) using Z2=[1 GPCP_git GPCP_git-
1 Xit], where GPCP_git is the growth in rainfall in country i in period t (GPCP_g).
(1 point)

a. Are the instruments weak? Why? (1/2 point)

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b. Discuss the result of the Sargan test. (1/2 point)

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c. Test the endogeneity of gdp_g based on the IV-2SLS estimator using Z2.
Discuss the results (1/2 point)

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5) Compute the 1-step and the 2-step IV-GMM estimates of the specification in
equation (2) using the orthogonality conditions given by Z1 (1 point)

a. Is there any difference between them? Why? (1/2 point)

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b. What is the result of the Hansen test? (1/2 point)

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6) Compute the 1-step and the iterative IV-GMM estimators using the
orthogonality conditions given by Z2

a. What is the main difference between the two estimators? (1 point)

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b. Discuss the result of the Hansen test of overidentifying restrictions (1/2

point)

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7) Compute the 2-step IV-GMM estimator using the orthogonality conditions

given by Z3=[1 GPCP_git GPCP_git-1 socit Xit], where socit is a dummy variable
equal to 1 for socialist countries and 0 otherwise. Test the validity of the
orthogonality condition associated to socit. (1 point)

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