FINAL REVIEWS

PART A: INSTRUMENTAL VARIABLES

1. What is endogenous problem? What causes endogenous?
2. What solutions are suggested when the model has endogenous problems?
3. What is the condition for the variable Z to be an instrumental variable for the endogenous
variable?
4. When is the instrumental variable Z called a weak instrumental variable? Should weak
instrumental variables be used for estimation?
5. Consider a simple model to estimate the effect of factors on number of children of a women in
Botswana:
𝑐ℎ𝑖𝑙𝑑𝑟𝑒𝑛 = 𝛽0 + 𝛽1 𝑒𝑑𝑢 + 𝛽2 𝑎𝑔𝑒 + 𝛽3 𝑎𝑔𝑒 2 + 𝑢
Where children, edu and age is number of children, years of education and the age of the
women.
a. Can the model (1) have an endogeneity problem? What is the endogenous variable
problem? What causes endogenous?
b. Assume that edu is endogenous and the instrumental variable method is used to estimate
the model (1). Please suggest an instrumental variable Z for edu?

PART B: PANEL MODELS

1. What are the advantages of the panel data model?
2. Compare the difference of FE and RE models? What is the basis for choosing FE or RE to
estimate the model with panel data? Which test is used for selection?
3. What is balanced panel data? What causes unbalance?
4. The defect test results of the regression model are reported as follows:
Modified Wald test for groupwise heteroskedasticity
in fixed effect regression model

H0: sigma(i)^2 = sigma^2 for all i

chi2 (2094) = 2.1e+05

Prob>chi2 = 0.0000
What defects does the model have? How to fix it?
5. To evaluate the impact of FDI on business performance, we consider the following model
ln 𝑉𝐴𝑖𝑡 = 𝛽0 + 𝛽1 ln 𝐾𝑖𝑡 + 𝛽2 ln 𝐿𝑖𝑡 + 𝛽3 𝐹𝐷𝐼𝑖𝑡 + 𝛽4 𝑒𝑑𝑢𝑖𝑡 + 𝛽5 𝑅𝐷𝑖𝑡 + 𝛽6 𝑠𝑖𝑧𝑒𝑖𝑡 + 𝑐𝑖 + 𝑢𝑖𝑡
where, ln 𝑉𝐴is the natural logarithm of total added value; 𝐹𝐷𝐼 is a dummy variable, equal to
1 if the enterprise has foreign direct investment, and zero otherwise; ln 𝐾 is the natural
logarithm of total capital; ln 𝐿 is the logarithm of total labor; 𝑒𝑑𝑢 is labor training cost/total
labor; 𝑅𝐷 is the total cost of research and development/total investment; 𝑠𝑖𝑧𝑒 is the size of the
business, the dummy variable includes 4 categories (1-super small; 2-small; 3-medium; 4-
large), and 𝑠𝑖𝑧𝑒_1 is the base category.
The estimated results of the panel model are reported below.
Fixed-effects (within) regression Number of obs = 736,694
Group variable: ma_thue Number of groups = 105,242
 R-sq: Obs per group:
within = 0.3026 min = 7
between = 0.8641 avg = 7.0
overall = 0.7677 max = 7

F(8,105241) = 15766.30
corr(u_i, Xb) = 0.4678 Prob > F = 0.0000

(Std. Err. adjusted for 105,242 clusters in ma_thue)

------------------------------------------------------------------------------
| Robust
ln_VA_ | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
ln_K_ | .152219 .0014121 107.80 0.000 .1494513 .1549867
ln_L_ | .7200339 .0031237 230.51 0.000 .7139116 .7261563
fdi_ | .2223424 .0356943 6.23 0.000 .1523822 .2923027
edu_ | .0001049 .0000345 3.04 0.002 .0000373 .0001725
R&D_ | .0000101 .0000192 -0.53 0.599 -.0000477 .0000275
|
size_ |
2 | .033728 .0042856 7.87 0.000 .0253283 .0421277
3 | -.0277995 .0080698 -3.44 0.001 -.0436162 -.0119827
4 | -.0874293 .0115103 -7.60 0.000 -.1099893 -.0648694
|
_cons | 3.944356 .0112145 351.72 0.000 3.922376 3.966336
-------------+----------------------------------------------------------------
sigma_u | .67424384
sigma_e | .63714114
rho | .52827013 (fraction of variance due to u_i)
------------------------------------------------------------------------------

a. How many observations are included in the data? Is the data balanced?
b. Is the above result estimated from the fixed effects model or the random effects model?
c. Explain the meaning of the estimate coefficient of the variable 𝐹𝐷𝐼
d. From the estimated coefficient of the variable 𝑒𝑑𝑢, how do you conclude about the impact
of spending on labor training on the performance of the enterprise?
e. From the estimated coefficient of the variable RD, how do you conclude about the impact
of spending on R&D on the performance of the business?
f. Can it be concluded that enterprise size has a positive effect on firm performance? Why?

PART C: LOGIT/PROBIT MODELS

1. In what cases is the logit/probit model used? For example.
2. In what cases is the ordered logit/probit model used? For example.
3. Consider the logit/probit model with the dependent variable Y receiving the value 1 if the
household decides to invest on high-techonogy in agriculture production; and 0 otherwise; the
independent variables age, edu, female and urban are age, education (number of years of
schooling), gender (female =1 if the head of household is female, 0 otherwise) of the household
head, urban = 1 if household lives in urban areas, 0 otherwise.
The estimated results and marginal effects are as follows:
Logistic regression Number of obs = 190
LR chi2(3) = 20.35
Prob > chi2 = 0.0001
Log likelihood = -94.991141 Pseudo R2 = 0.0967

------------------------------------------------------------------------------
 Y | Coefficient Std. err. z P>|z| [95% conf. interval]
-------------+----------------------------------------------------------------
edu | .6286031 .1874322 2.29 0.022 .0612428 .7959634
age | -.3812022 .2005924 -2.90 0.004 -.9743561 -.1880483
female | 1.21768 .3858659 3.16 0.002 .4613966 1.973963
urban | 0.81768 .3858659 3.02 0.012 .4613966 1.973963
_cons | .7147315 .2287764 3.12 0.002 .266338 1.163125
------------------------------------------------------------------------------

Average marginal effects Number of obs = 190

------------------------------------------------------------------------------
| Delta-method
| dy/dx std. err. z P>|z| [95% conf. interval]
-------------+----------------------------------------------------------------
edu | .0202377 .0295193 2.38 0.317 .012381 .1280944
age | -.045245 .0306121 -3.11 0.002 -.1552437 -.0352464
female | .0698944 .0593228 3.37 0.001 .0836237 .316165
urban | .1198944 .0593228 3.37 0.001 .0836237 .316165
------------------------------------------------------------------------------
Explain the effect of education, age, gender on the probability of household’ decision.

4. Consider a ordered logit model with the dependent variable being the occupational success
level of an employee (1-very unsuccessful; 2-unsuccessful; 3-normal; 4-successful; 5-very
successful). The dependent variables includes: edu is the graduate class (edu = 1 if average,
good average; 2-fair; 3-good and excellent); exper is the number of years of experience; exper2
is the square of the exper; and female is the gender of the employee (female =1 if female, 0
otherwise)
The estimated results and marginal effects are as follows:
Ordered logistic regression Number of obs = 1,368
LR chi2(5) = 40.73
Prob > chi2 = 0.0000
Log likelihood = -1472.6269 Pseudo R2 = 0.0136

------------------------------------------------------------------------------
success | Coefficient Std. err. z P>|z| [95% conf. interval]
-------------+----------------------------------------------------------------
educ |
2 | .8877881 .2864896 3.10 0.002 .3262788 1.449297
3 | 1.302767 .2935551 4.44 0.000 .7274095 1.878124
|
exper | .1974424 .0704495 2.80 0.005 .0593639 .3355209
exper2 | -.0130093 .0072965 -1.78 0.075 -.0273101 .0012916
female | .0460562 .1184381 0.39 0.697 -.1860783 .2781907
-------------+----------------------------------------------------------------
/cut1 | -2.88267 .3988696 -3.66444 -2.100899
/cut2 | .264164 .3232252 -.3693457 .8976736
/cut3 | 2.799348 .3334358 2.145825 3.45287
/cut4 | 6.099841 .4150059 5.286444 6.913238
------------------------------------------------------------------------------

Average marginal effects Number of obs = 1,368

Model VCE: OIM
------------------------------------------------------------------------------
| Delta-method
| dy/dx std. err. z P>|z| [95% conf. interval]
-------------+----------------------------------------------------------------
1.educ | (base outcome)
-------------+----------------------------------------------------------------
2.educ |
_predict |
1 | -.0181065 .0093111 -1.94 0.052 -.0363558 .0001429
2 | -.1719941 .0600635 -2.86 0.004 -.2897164 -.0542719
3 | .0792626 .0427112 1.86 0.063 -.0044498 .162975
 4 | .1051251 .0259453 4.05 0.000 .0542731 .155977
5 | .0057129 .0019001 3.01 0.003 .0019888 .009437
-------------+----------------------------------------------------------------
3.educ |
_predict |
1 | -.0225122 .0098177 -2.29 0.022 -.0417546 -.0032697
2 | -.233334 .0605014 -3.86 0.000 -.3519146 -.1147533
3 | .0686729 .0428189 1.60 0.109 -.0152506 .1525964
4 | .176522 .0284691 6.20 0.000 .1207237 .2323204
5 | .0106512 .0030129 3.54 0.000 .004746 .0165564
-------------+----------------------------------------------------------------
exper |
_predict |
1 | -.0022804 .0009913 -2.30 0.021 -.0042233 -.0003374
2 | -.0299306 .0106573 -2.81 0.005 -.0508185 -.0090427
3 | -.0030836 .0021873 -1.41 0.159 -.0073707 .0012034
4 | .0330172 .0117807 2.80 0.005 .0099274 .056107
5 | .0022774 .0009886 2.30 0.021 .0003398 .0042149
-------------+----------------------------------------------------------------
exper2 |
_predict |
1 | .0001503 .0000922 1.63 0.103 -.0000304 .0003309
2 | .0019721 .0011045 1.79 0.074 -.0001926 .0041368
3 | .0002032 .0001697 1.20 0.231 -.0001295 .0005358
4 | -.0021755 .0012208 -1.78 0.075 -.0045683 .0002173
5 | -.0001501 .000092 -1.63 0.103 -.0003303 .0000302
-------------+----------------------------------------------------------------
female |
_predict |
1 | -.0005319 .0013741 -0.39 0.699 -.0032251 .0021613
2 | -.0069817 .0179536 -0.39 0.697 -.0421701 .0282066
3 | -.0007193 .0019017 -0.38 0.705 -.0044466 .003008
4 | .0077017 .0198058 0.39 0.697 -.0311169 .0465204
5 | .0005312 .0013724 0.39 0.699 -.0021587 .0032211
------------------------------------------------------------------------------
Note: dy/dx for factor levels is the discrete change from the base level.

Explain the effect of education, experience and gender on the probability of career success