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 Contents vii

10.5 Trends and Seasonality 360 Serial Correlation in the Presence of Lagged
Characterizing Trending Time Series 360 Dependent Variables 411
Using Trending Variables in Regression 12.2 Testing for Serial Correlation 412
Analysis 363 A t Test for AR(1) Serial Correlation with
A Detrending Interpretation of Regressions with Strictly Exogenous Regressors 412
a Time Trend 365 The Durbin-Watson Test under Classical
Computing R-Squared when the Dependent Assumptions 415
Variable Is Trending 366 Testing for AR(1) Serial Correlation without
Seasonality 368 Strictly Exogenous Regressors 416
Summary 370 Testing for Higher Order Serial
Key Terms 371 Correlation 417
Problems 371 12.3 Correcting for Serial Correlation with Strictly
Computer Exercises 373 Exogenous Regressors 419
Obtaining the Best Linear Unbiased Estimator
CHAPTER 11 in the AR(1) Model 419
Feasible GLS Estimation with AR(1)
Further Issues in Using OLS with Errors 421
Time Series Data 377 Comparing OLS and FGLS 423
Correcting for Higher Order Serial
11.1 Stationary and Weakly Dependent Correlation 425
Time Series 377 12.4 Differencing and Serial Correlation 426
Stationary and Nonstationary Time 12.5 Serial Correlation-Robust Inference
Series 378 after OLS 428
Weakly Dependent Time Series 379 12.6 Heteroskedasticity in Time Series
11.2 Asymptotic Properties of OLS 381 Regressions 432
11.3 Using Highly Persistent Time Series in Heteroskedasticity-Robust Statistics 432
Regression Analysis 388 Testing for Heteroskedasticity 432
Highly Persistent Time Series 388 Autoregressive Conditional
Transformations on Highly Persistent Heteroskedasticity 433
Time Series 393 Heteroskedasticity and Serial Correlation in
Deciding Whether a Time Series Regression Models 435
Is I(1) 394 Summary 437
11.4 Dynamically Complete Models and the Absence Key Terms 437
of Serial Correlation 396 Problems 438
11.5 The Homoskedasticity Assumption for Time Computer Exercises 438
Series Models 399
Summary 400
PART 3
Key Terms 401
Problems 401
Computer Exercises 404
Advanced Topics 443
CHAPTER 13
CHAPTER 12
Pooling Cross Sections across Time:
Serial Correlation and
Simple Panel Data Methods 444
Heteroskedasticity in Time
Series Regressions 408 13.1 Pooling Independent Cross Sections
across Time 445
12.1 Properties of OLS with Serially Correlated The Chow Test for Structural Change
Errors 408 across Time 449
Unbiasedness and Consistency 408 13.2 Policy Analysis with Pooled Cross Sections 450
Efficiency and Inference 409 13.3 Two-Period Panel Data Analysis 455
Goodness-of-Fit 410 Organizing Panel Data 461
viii Contents

13.4 Policy Analysis with Two-Period 15.4 IV Solutions to Errors-in-Variables

Panel Data 462 Problems 525
13.5 Differencing with More Than Two 15.5 Testing for Endogeneity and Testing
Time Periods 465 Overidentifying Restrictions 527
Potential Pitfalls in First Differencing Testing for Endogeneity 527
Panel Data 470 Testing Overidentification Restrictions 529
Summary 471 15.6 2SLS with Heteroskedasticity 531
Key Terms 471 15.7 Applying 2SLS to Time Series Equations 531
Problems 471 15.8 Applying 2SLS to Pooled Cross Sections and
Computer Exercises 473 Panel Data 534
Appendix 13A 478 Summary 536
Key Terms 536
CHAPTER 14 Problems 536
Advanced Panel Data Methods 481 Computer Exercises 539
Appendix 15A 543
14.1 Fixed Effects Estimation 481
The Dummy Variable Regression 485 CHAPTER 16
Fixed Effects or First Differencing? 487 Simultaneous Equations Models 546
Fixed Effects with Unbalanced Panels 488
14.2 Random Effects Models 489 16.1 The Nature of Simultaneous Equations
Random Effects or Fixed Effects? 493 Models 546
14.3 Applying Panel Data Methods to Other 16.2 Simultaneity Bias in OLS 550
Data Structures 494 16.3 Identifying and Estimating a Structural
Summary 496 Equation 552
Key Terms 496 Identification in a Two-Equation System 552
Problems 497 Estimation by 2SLS 557
Computer Exercises 498 16.4 Systems with More Than Two Equations 559
Appendix 14A 503 Identification in Systems with Three or
More Equations 559
CHAPTER 15 Estimation 560
Instrumental Variables Estimation 16.5 Simultaneous Equations Models with
Time Series 560
and Two Stage Least Squares 506 16.6 Simultaneous Equations Models with
Panel Data 564
15.1 Motivation: Omitted Variables in a Simple
Summary 566
Regression Model 507
Key Terms 567
Statistical Inference with the
Problems 567
IV Estimator 510
Computer Exercises 570
Properties of IV with a Poor Instrumental
Variable 514
CHAPTER 17
Computing R-Squared after
IV Estimation 516 Limited Dependent Variable
15.2 IV Estimation of the Multiple Regression Models and Sample Selection
Model 517
15.3 Two Stage Least Squares 521 Corrections 574
A Single Endogenous Explanatory
Variable 521 17.1 Logit and Probit Models for Binary
Multicollinearity and 2SLS 523 Response 575
Multiple Endogenous Explanatory Specifying Logit and Probit Models 575
Variables 524 Maximum Likelihood Estimation of Logit and
Testing Multiple Hypotheses after Probit Models 578
2SLS Estimation 525 Testing Multiple Hypotheses 579
 Contents ix

Interpreting the Logit and Probit 19.2 Literature Review 670

Estimates 580 19.3 Data Collection 671
17.2 The Tobit Model for Corner Solution Deciding on the Appropriate Data Set 671
Responses 587 Entering and Storing Your Data 672
Interpreting the Tobit Estimates 589 Inspecting, Cleaning, and Summarizing
Specification Issues in Tobit Models 594 Your Data 673
17.3 The Poisson Regression Model 595 19.4 Econometric Analysis 675
17.4 Censored and Truncated Regression 19.5 Writing an Empirical Paper 678
Models 600 Introduction 678
Censored Regression Models 601 Conceptual (or Theoretical) Framework 679
Truncated Regression Models 604 Econometric Models and Estimation
17.5 Sample Selection Corrections 606 Methods 679
When Is OLS on the Selected Sample The Data 682
Consistent? 607 Results 682
Incidental Truncation 608 Conclusions 683
Summary 612 Style Hints 684
Key Terms 613 Summary 687
Problems 614 Key Terms 687
Computer Exercises 615 Sample Empirical Projects 687
Appendix 17A 620 List of Journals 692
Appendix 17B 621 Data Sources 693

CHAPTER 18 APPENDIX A
Advanced Time Series Topics 623 Basic Mathematical Tools 695
18.1 Infinite Distributed Lag Models 624 A.1 The Summation Operator and Descriptive
The Geometric (or Koyck) Distributed Lag 626 Statistics 695
Rational Distributed Lag Models 628 A.2 Properties of Linear Functions 697
18.2 Testing for Unit Roots 630 A.3 Proportions and Percentages 699
18.3 Spurious Regression 636 A.4 Some Special Functions and
18.4 Cointegration and Error Correction Models 637 Their Properties 702
Cointegration 637 Quadratic Functions 702
Error Correction Models 643 The Natural Logarithm 704
18.5 Forecasting 645 The Exponential Function 708
Types of Regression Models Used for A.5 Differential Calculus 709
Forecasting 646 Summary 711
One-Step-Ahead Forecasting 647 Key Terms 711
Comparing One-Step-Ahead Forecasts 651 Problems 711
Multiple-Step-Ahead Forecasts 652
Forecasting Trending, Seasonal, and Integrated APPENDIX B
Processes 655
Summary 660 Fundamentals of Probability 714
Key Terms 661
Problems 661 B.1 Random Variables and Their Probability
Computer Exercises 663 Distributions 714
Discrete Random Variables 715
CHAPTER 19 Continuous Random Variables 717
B.2 Joint Distributions, Conditional Distributions,
Carrying Out an Empirical and Independence 719
Project 668 Joint Distributions and Independence 719
Conditional Distributions 721
19.1 Posing a Question 668 B.3 Features of Probability Distributions 722
x Contents

A Measure of Central Tendency: The Method of Moments 760

Expected Value 722 Maximum Likelihood 761
Properties of Expected Values 724 Least Squares 762
Another Measure of Central Tendency: C.5 Interval Estimation and Confidence
The Median 725 Intervals 762
Measures of Variability: Variance and Standard The Nature of Interval Estimation 762
Deviation 726 Confidence Intervals for the Mean from a
Variance 726 Normally Distributed Population 764
Standard Deviation 728 A Simple Rule of Thumb for a 95%
Standardizing a Random Variable 728 Confidence Interval 768
Skewness and Kurtosis 729 Asymptotic Confidence Intervals for
B.4 Features of Joint and Conditional Nonnormal Populations 768
Distributions 729 C.6 Hypothesis Testing 770
Measures of Association: Covariance and Fundamentals of Hypothesis Testing 770
Correlation 729 Testing Hypotheses about the Mean in a
Covariance 729 Normal Population 772
Correlation Coefficient 731 Asymptotic Tests for Nonnormal
Variance of Sums of Random Variables 732 Populations 774
Conditional Expectation 733 Computing and Using p-Values 776
Properties of Conditional Expectation 734 The Relationship between Confidence Intervals
Conditional Variance 736 and Hypothesis Testing 779
B.5 The Normal and Related Distributions 737 Practical versus Statistical Significance 780
The Normal Distribution 737 C.7 Remarks on Notation 781
The Standard Normal Distribution 738 Summary 782
Additional Properties of the Normal Key Terms 782
Distribution 740 Problems 783
The Chi-Square Distribution 741
The t Distribution 741 APPENDIX D
The F Distribution 743 Summary of Matrix Algebra 788
Summary 744
Key Terms 744
D.1 Basic Definitions 788
Problems 745
D.2 Matrix Operations 789
Matrix Addition 789
APPENDIX C
Scalar Multiplication 790
Fundamentals of Mathematical Matrix Multiplication 790
Statistics 747 Transpose 791
Partitioned Matrix Multiplication 792
C.1 Populations, Parameters, and Random Trace 792
Sampling 747 Inverse 792
Sampling 748 D.3 Linear Independence and Rank
C.2 Finite Sample Properties of Estimators 748 of a Matrix 793
Estimators and Estimates 749 D.4 Quadratic Forms and Positive Definite
Unbiasedness 750 Matrices 793
The Sampling Variance of Estimators 752 D.5 Idempotent Matrices 794
Efficiency 754 D.6 Differentiation of Linear and Quadratic
C.3 Asymptotic or Larger Sample Properties Forms 795
of Estimators 755 D.7 Moments and Distributions of
Consistency 755 Random Vectors 795
Asymptotic Normality 758 Expected Value 795
C.4 General Approaches to Parameter Variance-Covariance Matrix 795
Estimation 760 Multivariate Normal Distribution 796
 Contents xi

Chi-Square Distribution 796

APPENDIX F
t Distribution 797
F Distribution 797 Answers to Chapter Questions 813
Summary 797
Key Terms 797
Problems 798 APPENDIX G
Statistical Tables 823
APPENDIX E
The Linear Regression Model in
References 830
Matrix Form 799 Glossary 835
Index 849
E.1 The Model and Ordinary Least Squares
Estimation 799
E.2 Finite Sample Properties of OLS 801
E.3 Statistical Inference 805
E.4 Some Asymptotic Analysis 807
Wald Statistics for Testing Multiple
Hypotheses 809
Summary 810
Key Terms 811
Problems 811
Preface
My motivation for writing the first edition of Introductory Econometrics: A Modern
Approach was that I saw a fairly wide gap between how econometrics is taught to under-
graduates and how empirical researchers think about and apply econometric methods. I
became convinced that teaching introductory econometrics from the perspective of pro-
fessional users of econometrics would actually simplify the presentation, in addition to
making the subject much more interesting.
Based on the positive reactions to earlier editions, it appears that my hunch was cor-
rect. Many instructors, having a variety of backgrounds and interests and teaching students
with different levels of preparation, have embraced the modern approach to econometrics
espoused in this text. The emphasis in this edition is still on applying econometrics to
real-world problems. Each econometric method is motivated by a particular issue facing
researchers analyzing nonexperimental data. The focus in the main text is on understand-
ing and interpreting the assumptions in light of actual empirical applications: the math-
ematics required is no more than college algebra and basic probability and statistics.

Organized for Today’s Econometrics

Instructor
The fourth edition preserves the overall organization of the third. The most noticeable fea-
ture that distinguishes this text from most others is the separation of topics by the kind of
data being analyzed. This is a clear departure from the traditional approach, which presents
a linear model, lists all assumptions that may be needed at some future point in the analysis,
and then proves or asserts results without clearly connecting them to the assumptions. My
approach is first to treat, in Part 1, multiple regression analysis with cross-sectional data,
under the assumption of random sampling. This setting is natural to students because they
are familiar with random sampling from a population in their introductory statistics courses.
Importantly, it allows us to distinguish between assumptions made about the underlying
population regression model—assumptions that can be given economic or behavioral
content—from assumptions about how the data were sampled. Discussions about the con-
sequences of nonrandom sampling can be treated in an intuitive fashion after the students
have a good grasp of the multiple regression model estimated using random samples.
An important feature of a modern approach is that the explanatory variables—along
with the dependent variable—are treated as outcomes of random variables. For the social
sciences, allowing random explanatory variables is much more realistic than the traditional
assumption of nonrandom explanatory variables. As a nontrivial benefit, the population
model/random sampling approach reduces the number of assumptions that students must
absorb and understand. Ironically, the classical approach to regression analysis, which
treats the explanatory variables as fixed in repeated samples and is still pervasive in intro-
ductory texts, literally applies to data collected in an experimental setting. In addition, the
contortions required to state and explain assumptions can be confusing to students.
xii
 Preface xiii

My focus on the population model emphasizes that the fundamental assumptions under-
lying regression analysis, such as the zero mean assumption on the unobservables, are prop-
erly stated conditional on the explanatory variables. This leads to a clear understanding of
the kinds of problems, such as heteroskedasticity (nonconstant variance), that can invalidate
standard inference procedures. Also, I am able to dispel several misconceptions that arise
in econometrics texts at all levels. For example, I explain why the usual R-squared is still
valid as a goodness-of-fit measure in the presence of heteroskedasticity (Chapter 8) or seri-
ally correlated errors (Chapter 12); I demonstrate that tests for functional form should not
be viewed as general tests of omitted variables (Chapter 9); and I explain why one should
always include in a regression model extra control variables that are uncorrelated with the
explanatory variable of interest, often the key policy variable (Chapter 6).
Because the assumptions for cross-sectional analysis are relatively straightforward yet
realistic, students can get involved early with serious cross-sectional applications without
having to worry about the thorny issues of trends, seasonality, serial correlation, high
persistence, and spurious regression that are ubiquitous in time series regression models.
Initially, I figured that my treatment of regression with cross-sectional data followed by
regression with time series data would find favor with instructors whose own research
interests are in applied microeconomics, and that appears to be the case. It has been grati-
fying that adopters of the text with an applied time series bent have been equally enthusi-
astic about the structure of the text. By postponing the econometric analysis of time series
data, I am able to put proper focus on the potential pitfalls in analyzing time series data
that do not arise with cross-sectional data. In effect, time series econometrics finally gets
the serious treatment it deserves in an introductory text.
As in the earlier editions, I have consciously chosen topics that are important for
reading journal articles and for conducting basic empirical research. Within each topic,
I have deliberately omitted many tests and estimation procedures that, while traditionally
included in textbooks, have not withstood the empirical test of time. Likewise, I have
emphasized more recent topics that have clearly demonstrated their usefulness, such
as obtaining test statistics that are robust to heteroskedasticity (or serial correlation) of
unknown form, using multiple years of data for policy analysis, or solving the omitted
variable problem by instrumental variables methods. I appear to have made sound choices,
as I have received only a handful of suggestions for adding or deleting material.
I take a systematic approach throughout the text, by which I mean that each topic is
presented by building on the previous material in a logical fashion, and assumptions are
introduced only as they are needed to obtain a conclusion. For example, professional users
of econometrics understand that not all of the Gauss-Markov assumptions are needed to
show that the ordinary least squares (OLS) estimators are unbiased. Yet the vast majority
of econometrics texts introduce a complete set of assumptions (many of which are redun-
dant or in some cases even logically conflicting) before proving the unbiasedness of OLS.
Similarly, the normality assumption is often included among the assumptions that are
needed for the Gauss-Markov Theorem, even though it is fairly well known that normality
plays no role in showing that the OLS estimators are the best linear unbiased estimators.
My systematic approach is illustrated by the order of assumptions that I use for mul-
tiple regression in Part 1. This ordering results in a natural progression for briefly sum-
marizing the role of each assumption:
MLR.1: Introduce the population model and interpret the population parameters
(which we hope to estimate).
xiv Preface

MLR.2: Introduce random sampling from the population and describe the data that we
use to estimate the population parameters.
MLR.3: Add the assumption on the explanatory variables that allows us to compute
the estimates from our sample; this is the so-called no perfect collinearity
assumption.
MLR.4: Assume that, in the population, the mean of the unobservable error does not
depend on the values of the explanatory variables; this is the “mean indepen-
dence” assumption combined with a zero population mean for the error, and
it is the key assumption that delivers unbiasedness of OLS.
After introducing Assumptions MLR.1 to MLR.3, one can discuss the algebraic
properties of ordinary least squares—that is, the properties of OLS for a particular set of
data. By adding Assumption MLR.4, we can show that OLS is unbiased (and consistent).
Assumption MLR.5 (homoskedasticity) is added for the Gauss-Markov Theorem (and for
the usual OLS variance formulas to be valid), and MLR.6 (normality) is added to round
out the classical linear model assumptions (for exact statistical inference).
I use parallel approaches when I turn to the study of large-sample properties and
when I treat regression for time series data in Part 2. The careful presentation and dis-
cussion of assumptions makes it relatively easy to cover more advanced topics, such as
using pooled cross sections, exploiting panel data structures, and applying instrumental
variables methods. Generally, I have strived to provide a unified view of econometrics,
where all estimators and test statistics are obtained using just a few intuitively reasonable
principles of estimation and testing (which, of course, also have rigorous justification). For
example, regression-based tests for heteroskedasticity and serial correlation are easy for
students to grasp because they already have a solid understanding of regression. This is in
contrast to treatments that give a set of disjointed recipes for outdated econometric testing
procedures.
Throughout the text, I emphasize ceteris paribus relationships, which is why, after one
chapter on the simple regression model, I move to multiple regression analysis. The mul-
tiple regression setting motivates students to think about serious applications early. I also
give prominence to policy analysis with all kinds of data structures. Practical topics, such
as using proxy variables to obtain ceteris paribus effects and interpreting partial effects in
models with interaction terms, are covered in a simple fashion.

New to This Edition

Specific changes to this edition include a discussion of variance inflation factors in
Chapter 3. Until now, I have resisted including a formal discussion of the diagnostics
available for detecting multicollinearity. In this edition, with some reservations, I provide
a brief discussion. My view from earlier editions—that multicollinearity is still a poorly
understood issue and that claims that one can detect and correct for multicollinearity are
wrongheaded—have not changed. But I find myself having to repeatedly explain the use
and limits of statistics such as variance inflation factors, and so I have decided to confront
the issue head-on.
In Chapter 6, I add a discussion of the so-called smearing estimate for retransformation
after estimating a linear model where the dependent variable is in logarithmic form. The
smearing approach is widely used and simple to implement; it was an oversight of mine
not to include it in previous editions. On a related matter, I have also added material on
 Preface xv

obtaining a 95% prediction interval after retransforming a model that satisfies the classical
linear model assumptions.
In Chapter 8, I changed Example 8.6 to one that uses a more modern, much larger data
set on financial wealth, income, and participation in 401(k) pension plans. This example,
in conjunction with a new subsection on weighted least squares with a misspecified vari-
ance function, provides a nice illustration of how weighted least squares can be signifi-
cantly more efficient than ordinary least squares, even if we allow the variance function to
be misspecified.
Another new subsection in Chapter 8 discusses the problem of prediction after retrans-
formation in a model with a logarithmic dependent variable and heteroskedasticity in the
orginal linear model.
Chapter 9 contains several new items. First, I provide a brief discussion of models
with random slopes. I provide this material as an introduction to the notion that marginal
effects can depend on unobserved individual heterogeneity. In the discussion of outliers
and influential data, I have included a description of “studentized residuals” as a way to
determine influential data points. I also note how these are easily obtained by dummying
out an observation. Finally, the increasingly important method of least absolute deviations
(LAD) is now more fully described in a new subsection. In the computer exercises, a new
data set on the compensation of Michigan elemenatary school teachers is used to illustrate
the resilience of LAD to the inclusion of suspicious data points.
In the time series chapters, Chapters 10, 11, and 12, two new examples (and data sets
on the U.S. economy) are included. The first is a simple equation known in macroeconom-
ics as Okun’s Law; the second is a sector-specific analysis of the effects of the minimum
wage. These examples nicely illustrate practical applications to economics of regression
with time series data.
The advanced chapters now include discussions of the Chow test for panel data
(Chapter 13), a more detailed discussion of pooled OLS and panel data methods for cluster
samples (Chapter 14), and better discussions of the problems of a weak instrument and the
nature of overidentification tests with instrumental variables (Chapter 15).
In Chapter 17, I expand the discussion of estimating partial effects in nonlinear models,
emphasizing the difference between partial effects evaluated at averages of the regressors
versus averaging the partial effects across all units.
I have added more data sets for the fourth edition. I previously mentioned the school-
level data set on teachers’ compensation (ELEM94_95.RAW). In addition, a data set on
charitable contributions in the Netherlands (CHARITY.RAW) is used in some new prob-
lems. The two new time series data sets are OKUN.RAW and MINWAGE.RAW.
A few other data sets, not used in the text, will be available on the text’s companion Web
site, including a data set on salaries and publication records of economics professors at Big
Ten universities.

Targeted at Undergraduates,
Adaptable for Master’s Students
The text is designed for undergraduate economics majors who have taken college alge-
bra and one semester of introductory probability and statistics. (Appendices A, B, and C
contain the requisite background material.) A one-semester or one-quarter econometrics
course would not be expected to cover all, or even any, of the more advanced material in
xvi Preface

Part 3. A typical introductory course includes Chapters 1 through 8, which cover the basics
of simple and multiple regression for cross-sectional data. Provided the emphasis is on
intuition and interpreting the empirical examples, the material from the first eight chapters
should be accessible to undergraduates in most economics departments. Most instructors
will also want to cover at least parts of the chapters on regression analysis with time series
data, Chapters 10, 11, and 12, with varying degrees of depth. In the one-semester course
that I teach at Michigan State, I cover Chapter 10 fairly carefully, give an overview of
the material in Chapter 11, and cover the material on serial correlation in Chapter 12. I
find that this basic one-semester course puts students on a solid footing to write empirical
papers, such as a term paper, a senior seminar paper, or a senior thesis. Chapter 9 con-
tains more specialized topics that arise in analyzing cross-sectional data, including data
problems such as outliers and nonrandom sampling; for a one-semester course, it can be
skipped without loss of continuity.
The structure of the text makes it ideal for a course with a cross-sectional or policy
analysis focus: the time series chapters can be skipped in lieu of topics from Chapters 9,
13, 14, or 15. Chapter 13 is advanced only in the sense that it treats two new data struc-
tures: independently pooled cross sections and two-period panel data analysis. Such data
structures are especially useful for policy analysis, and the chapter provides several exam-
ples. Students with a good grasp of Chapters 1 through 8 will have little difficulty with
Chapter 13. Chapter 14 covers more advanced panel data methods and would probably be
covered only in a second course. A good way to end a course on cross-sectional methods
is to cover the rudiments of instrumental variables estimation in Chapter 15.
I have used selected material in Part 3, including Chapters 13, 14, 15, and 17, in a
senior seminar geared to producing a serious research paper. Along with the basic one-
semester course, students who have been exposed to basic panel data analysis, instrumen-
tal variables estimation, and limited dependent variable models are in a position to read
large segments of the applied social sciences literature. Chapter 17 provides an introduc-
tion to the most common limited dependent variable models.
The text is also well suited for an introductory master’s level course, where the empha-
sis is on applications rather than on derivations using matrix algebra. Still, for instructors
wanting to present the material in matrix form, Appendices D and E are self-contained
treatments of the matrix algebra and the multiple regression model in matrix form.
At Michigan State, PhD students in many fields that require data analysis—including
accounting, agricultural economics, development economics, finance, international eco-
nomics, labor economics, macroeconomics, political science, and public finance—have
found the text to be a useful bridge between the empirical work that they read and the more
theoretical econometrics they learn at the PhD level.

Design Features
Numerous in-text questions are scattered throughout, with answers supplied in Appendix F.
These questions are intended to provide students with immediate feedback. Each chapter
contains many numbered examples. Several of these are case studies drawn from recently
published papers, but where I have used my judgment to simplify the analysis, hopefully
without sacrificing the main point.
The end-of-chapter problems and computer exercises are heavily oriented toward
empirical work, rather than complicated derivations. The students are asked to carefully
 Preface xvii

reason based on what they have learned. The computer exercises often expand on the
in-text examples. Several exercises use data sets from published works or similar data sets
that are motivated by published research in economics and other fields.
A pioneering feature of this introductory econometrics text is the extensive glossary.
The short definitions and descriptions are a helpful refresher for students studying for
exams or reading empirical research that uses econometric methods. I have added and
updated several entries for the fourth edition.

Student Supplements
The Student Solutions Manual (ISBN 0-324-58658-2) contains suggestions on how to read
each chapter as well as answers to selected problems and computer exercises. The Student
Solutions Manual can be accessed online at academic.cengage.com/login. An access code
has been packaged with every new book and is required to access the material online. For
students who purchase a used book, the access code may be purchased from the same
website.
With their single sign-on access code, students also can access the data sets that
accompany the text, as well as link to EconApps, a continually updated collection of eco-
nomic news, debates, and data.

Instructor Supplements
The Instructor’s Manual with Solutions (ISBN 0-324-58657-4) contains answers to all
exercises, as well as teaching tips on how to present the material in each chapter. The
instructor’s manual also contains sources for each of the data files, with many suggestions
for how to use them on problem sets, exams, and term papers. This supplement is available
online only to instructors at academic.cengage.com/economics/wooldridge.
Upon the instructor’s request, EViews Student Version can be bundled with the text
for an additional $18 per book. With EViews, students can do homework anywhere they
have access to a PC. However, because Student EViews restricts the size of a data set that
can be analyzed, some of the full data sets used in the text and in the problems cannot be
used in Student EViews. Instead, with the exception of a few of the data sets used only in
Part 3 of the text, I have provided smaller versions of the EViews data sets that can be used
in Student EViews. These are described in the instructor’s manual. For more information
on this special EViews offer, contact your South-Western/Cengage Learning representa-
tive or call Cengage Learning Customer & Sales Support at 1-800-354-9706.

Data Sets—Available in Four Formats

About 100 data sets are available in ASCII, EViews, Excel, and Stata. Because most of the
data sets come from actual research, some are very large. Except for partially listing data
sets to illustrate the various data structures, the data sets are not reported in the text. This
book is geared to a course where computer work plays an integral role. An extensive data
description manual is available online. This manual contains a list of data sources along
with suggestions for ways to use the data sets that are not described in the text. Instructors
can access the data sets at this book’s companion site at academic.cengage.com/economics/
wooldridge.
xviii Preface

An online access card has been packaged with every new book, which will give stu-
dents access to all of these data sets and the data description manual.

Suggestions for Designing Your Course

I have already commented on the contents of most of the chapters as well as possible out-
lines for courses. Here I provide more specific comments about material in chapters that
might be covered or skipped.
Chapter 9 has some interesting examples (such as a wage regression that includes IQ
score as an explanatory variable). The rubric of proxy variables does not have to be for-
mally introduced to present these kinds of examples, and I typically do so when finishing
up cross-sectional analysis. In Chapter 12, for a one-semester course, I skip the material
on serial correlation robust inference for ordinary least squares as well as dynamic models
of heteroskedasticity.
Even in a second course, I tend to spend only a little time on Chapter 16, which cov-
ers simultaneous equations analysis. If people differ about one issue, it is the importance
of simultaneous equations. Some think this material is fundamental; others think it is
rarely applicable. My own view is that simultaneous equations models are overused
(see Chapter 16 for a discussion). If one reads applications carefully, omitted variables
and measurement error are much more likely to be the reason one adopts instrumental
variables estimation, and this is why I use omitted variables to motivate instrumental
variables estimation in Chapter 15. Still, simultaneous equations models are indispens-
able for estimating demand and supply functions, and they apply in some other important
cases as well.
Chapter 17 is the only chapter that considers models inherently nonlinear in their
parameters, and this puts an extra burden on the student. The first material one should
cover in this chapter is on probit and logit models for binary response. My presentation
of Tobit models and censored regression still appears to be novel: I explicitly recognize
that the Tobit model is applied to corner solution outcomes on random samples, while
censored regression is applied when the data collection process censors the dependent
variable.
Chapter 18 covers some recent important topics from time series econometrics, includ-
ing testing for unit roots and cointegration. I cover this material only in a second-semester
course at either the undergraduate or master’s level. A fairly detailed introduction to fore-
casting is also included in Chapter 18.
Chapter 19, which would be added to the syllabus for a course that requires a term
paper, is much more extensive than similar chapters in other texts. It summarizes some
of the methods appropriate for various kinds of problems and data structures, points out
potential pitfalls, explains in some detail how to write a term paper in empirical econom-
ics, and includes suggestions for possible projects.
 Preface xix

Acknowledgements
I would like to thank those who reviewed the proposal for the fourth edition or provided
helpful comments on the third edition:
Swarnjit S. Arora Dec Mullarkey
University of Wisconsin—Milwaukee Boston College
Jushan Bai Kevin J. Murphy
New York University Oakland University
Edward Coulson Leslie Papke
Penn State University Michigan State University
Lisa M. Dickson Subhash Ray
University of Maryland—Baltimore University of Connecticut
County Edwin A. Sexton
Angela K. Dills Brigham Young University—Idaho
Clemson University Lara Shore-Sheppard
Michael Jansson Williams College
University of California—Berkeley Jeffrey Smith
Subal C. Kumbhakar University of Michigan
State University of New York— Stephen Stageberg
Binghamton University of Mary Washington
Angelo Melino Timothy Vogelsang
University of Toronto Michigan State University
Daniel Monchuk Anne E. Winkler
University of Southern Mississippi University of Missouri—St. Louis
Several of the changes I discussed earlier were driven by comments I received from
people on this list, and I continue to mull over specific suggestions made by one or more
reviewers.
Many students and teaching assistants, too numerous to list, have caught mistakes in
earlier editions or have suggested rewording some paragraphs. I am grateful to them.
Thanks to the people at South-Western/Cengage Learning, the revision process has,
once again, gone smoothly. Mike Worls, my longtime acquistions editor, has been sup-
portive, as always, and Laura Bofinger hit the ground running as my new developmental
editor. I benefitted from the enthusiasm Laura brought to the project.
Martha Conway did a terrific job as project manager, and Charu Khanna at Macmillan
Publishing Solutions professionally and efficiently oversaw the typesetting of the
manuscript.
This book is dedicated to my wife, Leslie—who subjected her senior seminar students
to the third edition—and to our children, Edmund and Gwenyth—who now understand
enough about economics to know that they would rather be “real” scientists.

Jeffrey M. Wooldridge
About the Author
Jeffrey M. Wooldridge is University Distinguished Professor of Economics at Michigan
State University, where he has taught since 1991. From 1986 to 1991, Dr. Wooldridge
was an assistant professor of economics at the Massachusetts Institute of Technology.
He received his bachelor of arts, with majors in computer science and economics, from
the University of California, Berkeley, in 1982 and received his doctorate in econom-
ics in 1986 from the University of California, San Diego. Dr. Wooldridge has published
more than three dozen articles in internationally recognized journals, as well as several
book chapters. He is also the author of Econometric Analysis of Cross Section and Panel
Data. His awards include an Alfred P. Sloan Research Fellowship, the Plura Scripsit
award from Econometric Theory, the Sir Richard Stone prize from the Journal of Applied
Econometrics, and three graduate teacher-of-the-year awards from MIT. He is a fellow of
the Econometric Society and of the Journal of Econometrics. Dr. Wooldridge has been
editor of the Journal of Business and Economic Statistics and econometrics coeditor of
Economics Letters, and he has served on the editorial boards of Econometric Theory, the
Journal of Economic Literature, the Journal of Econometrics, the Review of Economics
and Statistics, and the Stata Journal. He has also acted as an occasional econometrics con-
sultant for Arthur Andersen, Charles River Associates, and the Washington State Institute
for Public Policy.

xx
 CHAPTER 1
The Nature of Econometrics
and Economic Data

C
hapter 1 discusses the scope of econometrics and raises general issues that arise in
the application of econometric methods. Section 1.3 examines the kinds of data sets
that are used in business, economics, and other social sciences. Section 1.4 provides
an intuitive discussion of the difficulties associated with the inference of causality in the
social sciences.

1.1 What Is Econometrics?

Imagine that you are hired by your state government to evaluate the effectiveness of a
publicly funded job training program. Suppose this program teaches workers various ways
to use computers in the manufacturing process. The twenty-week program offers courses
during nonworking hours. Any hourly manufacturing worker may participate, and enroll-
ment in all or part of the program is voluntary. You are to determine what, if any, effect
the training program has on each worker’s subsequent hourly wage.
Now, suppose you work for an investment bank. You are to study the returns on dif-
ferent investment strategies involving short-term U.S. treasury bills to decide whether they
comply with implied economic theories.
The task of answering such questions may seem daunting at first. At this point, you
may only have a vague idea of the kind of data you would need to collect. By the end of
this introductory econometrics course, you should know how to use econometric methods
to formally evaluate a job training program or to test a simple economic theory.
Econometrics is based upon the development of statistical methods for estimating
economic relationships, testing economic theories, and evaluating and implementing
government and business policy. The most common application of econometrics is the
forecasting of such important macroeconomic variables as interest rates, inflation rates,
and gross domestic product. Whereas forecasts of economic indicators are highly visible
and often widely published, econometric methods can be used in economic areas that have
nothing to do with macroeconomic forecasting. For example, we will study the effects of
political campaign expenditures on voting outcomes. We will consider the effect of school
spending on student performance in the field of education. In addition, we will learn how
to use econometric methods for forecasting economic time series.

1
2 Chapter 1 The Nature of Econometrics and Economic Data

Econometrics has evolved as a separate discipline from mathematical statistics

because the former focuses on the problems inherent in collecting and analyzing nonex-
perimental economic data. Nonexperimental data are not accumulated through con-
trolled experiments on individuals, firms, or segments of the economy. (Nonexperimental
data are sometimes called observational data, or retrospective data, to emphasize the
fact that the researcher is a passive collector of the data.) Experimental data are often
collected in laboratory environments in the natural sciences, but they are much more dif-
ficult to obtain in the social sciences. Although some social experiments can be devised,
it is often impossible, prohibitively expensive, or morally repugnant to conduct the kinds
of controlled experiments that would be needed to address economic issues. We give
some specific examples of the differences between experimental and nonexperimental
data in Section 1.4.
Naturally, econometricians have borrowed from mathematical statisticians whenever
possible. The method of multiple regression analysis is the mainstay in both fields, but its
focus and interpretation can differ markedly. In addition, economists have devised new
techniques to deal with the complexities of economic data and to test the predictions of
economic theories.

1.2 Steps in Empirical Economic Analysis

Econometric methods are relevant in virtually every branch of applied economics. They
come into play either when we have an economic theory to test or when we have a rela-
tionship in mind that has some importance for business decisions or policy analysis. An
empirical analysis uses data to test a theory or to estimate a relationship.
How does one go about structuring an empirical economic analysis? It may seem
obvious, but it is worth emphasizing that the first step in any empirical analysis is the
careful formulation of the question of interest. The question might deal with testing a
certain aspect of an economic theory, or it might pertain to testing the effects of a gov-
ernment policy. In principle, econometric methods can be used to answer a wide range of
questions.
In some cases, especially those that involve the testing of economic theories, a formal
economic model is constructed. An economic model consists of mathematical equa-
tions that describe various relationships. Economists are well known for their building of
models to describe a vast array of behaviors. For example, in intermediate microeconom-
ics, individual consumption decisions, subject to a budget constraint, are described by
mathematical models. The basic premise underlying these models is utility maximization.
The assumption that individuals make choices to maximize their well-being, subject to
resource constraints, gives us a very powerful framework for creating tractable economic
models and making clear predictions. In the context of consumption decisions, utility
maximization leads to a set of demand equations. In a demand equation, the quantity
demanded of each commodity depends on the price of the goods, the price of substitute
and complementary goods, the consumer’s income, and the individual’s characteristics
that affect taste. These equations can form the basis of an econometric analysis of con-
sumer demand.
Economists have used basic economic tools, such as the utility maximization frame-
work, to explain behaviors that at first glance may appear to be noneconomic in nature.
A classic example is Becker’s (1968) economic model of criminal behavior.
 Chapter 1 The Nature of Econometrics and Economic Data 3

Example 1.1

[Economic Model of Crime]

In a seminal article, Nobel Prize winner Gary Becker postulated a utility maximization framework
to describe an individual’s participation in crime. Certain crimes have clear economic rewards, but
most criminal behaviors have costs. The opportunity costs of crime prevent the criminal from par-
ticipating in other activities such as legal employment. In addition, there are costs associated with
the possibility of being caught and then, if convicted, the costs associated with incarceration. From
Becker’s perspective, the decision to undertake illegal activity is one of resource allocation, with the
benefits and costs of competing activities taken into account.
Under general assumptions, we can derive an equation describing the amount of time spent in
criminal activity as a function of various factors. We might represent such a function as

y
f (x1, x2, x3, x4, x5, x6, x7), 1.1

where
y
hours spent in criminal activities,
x1
“wage” for an hour spent in criminal activity,
x2
hourly wage in legal employment,
x3
income other than from crime or employment,
x4
probability of getting caught,
x5
probability of being convicted if caught,
x6
expected sentence if convicted, and
x7
age.
Other factors generally affect a person’s decision to participate in crime, but the list above is repre-
sentative of what might result from a formal economic analysis. As is common in economic theory, we
have not been specific about the function f () in (1.1). This function depends on an underlying utility
function, which is rarely known. Nevertheless, we can use economic theory—or introspection—to
predict the effect that each variable would have on criminal activity. This is the basis for an economet-
ric analysis of individual criminal activity.

Formal economic modeling is sometimes the starting point for empirical analysis, but
it is more common to use economic theory less formally, or even to rely entirely on intui-
tion. You may agree that the determinants of criminal behavior appearing in equation (1.1)
are reasonable based on common sense; we might arrive at such an equation directly,
without starting from utility maximization. This view has some merit, although there are
cases in which formal derivations provide insights that intuition can overlook.
Next is an example of an equation that we can derive through somewhat informal
reasoning.

Example 1.2

[Job Training and Worker Productivity]

Consider the problem posed at the beginning of Section 1.1. A labor economist would like to
examine the effects of job training on worker productivity. In this case, there is little need for
formal economic theory. Basic economic understanding is sufficient for realizing that factors
such as education, experience, and training affect worker productivity. Also, economists are well
4 Chapter 1 The Nature of Econometrics and Economic Data

aware that workers are paid commensurate with their productivity. This simple reasoning leads
to a model such as

wage
f (educ, exper, training), 1.2

where
wage
hourly wage,
educ
years of formal education,
exper
years of workforce experience, and
training
weeks spent in job training.
Again, other factors generally affect the wage rate, but equation (1.2) captures the essence of the
problem.

After we specify an economic model, we need to turn it into what we call an econometric
model. Because we will deal with econometric models throughout this text, it is important
to know how an econometric model relates to an economic model. Take equation (1.1) as
an example. The form of the function f (•) must be specified before we can undertake an
econometric analysis. A second issue concerning (1.1) is how to deal with variables that
cannot reasonably be observed. For example, consider the wage that a person can earn
in criminal activity. In principle, such a quantity is well defined, but it would be difficult
if not impossible to observe this wage for a given individual. Even variables such as the
probability of being arrested cannot realistically be obtained for a given individual, but at
least we can observe relevant arrest statistics and derive a variable that approximates the
probability of arrest. Many other factors affect criminal behavior that we cannot even list,
let alone observe, but we must somehow account for them.
The ambiguities inherent in the economic model of crime are resolved by specifying a
particular econometric model:

crime

0 
1wagem 
2othinc 
3 freqarr 
4 freqconv


5 avgsen 
6 age  u, 1.3

where
crime
some measure of the frequency of criminal activity,
wagem
the wage that can be earned in legal employment,
othinc
the income from other sources (assets, inheritance, and so on),
freqarr
the frequency of arrests for prior infractions (to approximate
the probability of arrest),
freqconv
the frequency of conviction, and
avgsen
the average sentence length after conviction.

The choice of these variables is determined by the economic theory as well as data
considerations. The term u contains unobserved factors, such as the wage for criminal
activity, moral character, family background, and errors in measuring things like criminal
activity and the probability of arrest. We could add family background variables to the
model, such as number of siblings, parents’ education, and so on, but we can never elimi-
nate u entirely. In fact, dealing with this error term or disturbance term is perhaps the most
important component of any econometric analysis.
Another random document with
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animals and plants in order to live, so that we can further extend our
altruism at most to a moderate protection of other animals, if we are
to avoid injury to our own race. We may remark in passing that the
altruism of many lovers of animals, who prefer their favourite pets to
human beings and to the social welfare, is typical of the
exclusiveness and stupidity of misdirected impulses of sympathy.
Morality must therefore in the future consist of a common social
impulse—it must itself become social. This impulse must overthrow
not only egotism, but also the exclusiveness of individual
sympathies. We are still, alas, far from this goal! The family is often a
thieves’ kitchen; patriotism is a prolific parent of wars; while
communities and societies, however noble their objects may be,
readily degenerate into petty sects and cliques.
And now comes yet another difficulty, namely, the frequent lack of
harmony between the ethical motives which inspire an action and its
real moral value.

“Ich bin
Ein Theil von jener Kraft
Die stets das Böse will
Und stets das Gute schafft,”

says Mephistopheles in Goethe’s Faust.[B] Let us say often instead of

always, and mention also that other Power which often wills the good
and yet does the evil, and we have the well-known picture of the
intelligent, ambitious egotist, who, without any sense of duty,
achieves great and good results; and that of the foolish, infatuated
altruist, who devotes the whole might of his zeal for duty to the
service of socially pernicious forces!
[B] “I am a part of that power which always wills the evil and
always does the good.”

As a result of exaggerating the above-mentioned phenomena

certain theorists have imagined that ethics can be founded upon
pure egotism. But this is a mistake. Without the altruistic impulses of
sympathy and duty among its individual members no common social
existence can thrive; on the contrary, it must degenerate.
The power of the emotions in man is much too strong to allow of
any other result. Any one who imagines that he is completely master
of his emotions makes, if possible, a still greater mistake than one
who avows that he has never lied, or that his actions are governed
by free-will. All human morality is bound up with these impulses and
emotions. Socialism, for instance, will become moral, or else it will
not come to pass. Without the support of the social conscience of
mankind it cannot become moral. Every effort must therefore be
directed towards strengthening the social conscience.
The falsity of the theory of absolute good and evil is demonstrated
by the whole disposition of a world in which living creatures are
designed to prey upon one another. When a spider devours a fly it is
good for the spider and bad for the fly. The ethical value of the act
itself is therefore purely relative.
It is just the same with human ethics. To attempt to explain all the
evil in the world by the sin of Adam is to attribute a miserable
incapacity to God. The same holds true of the attempts of certain
modern Protestants to set up the dogma of a progressive revelation,
in order to bring the older dogmas into harmony with the theory of
evolution and descent. All these halting exegeses are only new
models of the artificial drags which theology seeks to impose upon
the free research of science.
Altruism and egotism stand only in relative opposition. Among ants
and bees they are instinctively adjusted to one another with
wonderful harmony, and are rarely, if ever, found in conflict. This
result can and must be striven after by mankind, however great may
be the difficulties presented by our hereditary nature. For its
achievement a harmonious co-operation of the hereditary social
conscience with reason and knowledge is absolutely necessary.
I must briefly mention two other points. Firstly, morality and social
or race hygiene become one and the same thing directly we include
in our conception of hygiene a healthy condition of the brain or soul,
and subordinate the individual hygiene to that of society in general.
Then everything socially unhygienic is immoral, and everything
immoral socially unhygienic. If, for instance, I ruin a healthy, active
member of society, in order possibly to achieve the salvation of an
incurably diseased criminal, I am committing, although from altruistic
motives, an act which is injurious from the point of view both of
ethics and social hygiene, and therefore evil and immoral.
Secondly, the boundaries of jurisprudence and of ethics are by no
means clear. Jurisprudence is more narrowly confined. It has no right
to lay claim to or to pass a verdict upon everything which ethics may
discover or attain. Laws and the constraint they imply are a
necessary evil, a crutch for the lame and defective social
conscience. They must be reduced to an indispensable minimum.
The ethical and social instincts, on the other hand, can never be too
highly developed. Humanity must gradually develop in the future to
such a point that jurisprudence may be completely replaced by an
instinctive and inculcated social impulse.

“Es erben sich Gesetz und Rechte

Wie eine ew’ge Krankheit fort.”[C]

[C] “Laws and statutes pass on in heritage, like an eternal

disease.”—Goethe, Faust.
In order now properly to understand our actual subject, viz. sexual
ethics, we must state the fact that an action, as well as the motives
which inspire it, may be either (1) ethically positive, i.e. good; (2)
ethically negative, i.e. evil; or (3) ethically indifferent, i.e. without any
relation to morals.
In their relationship to morals an action and its motive may be
completely independent of one another, as we have already seen.
We must further note that there are various degrees of duty, and
that from this cause conflicts may arise. There are duties towards
one’s self, which serve to increase the worth, and particularly the
social worth, of the individual by self-culture and education. In these
days of effeminate culture it is too often forgotten that self-discipline
and restraint, and even a certain degree of asceticism, fit the
individual for freedom and happiness, while the craving for pleasure
makes him useless and dependent.
Then there are duties towards the family and those nearer to us,
towards the State, towards existing Humanity, and towards posterity.
This last duty is the highest of all. Everything that we enjoy to-day in
culture and knowledge we owe to the toil, the suffering, and often the
martyrdom of our forefathers. Our most sacred duty is, therefore, to
secure for our descendants a loftier, happier and worthier existence
than our own.
Speaking generally, a rational system of morals must subordinate
the welfare of the individual to that of the community at large. A man
who is unprejudiced and possesses the ethical and social instinct will
therefore hold it as a principle first of all to do no man any injury;
then to develop his own individuality as highly as possible, which will
be both for his own good and that of the community; and as far as in
him lies to be of service to others and to Humanity.
From this we may derive the following commandment of sexual
ethics:—
Thou shalt take heed in thy sexual desire, in its manifestations in
thy soul, and chiefly in thy sexual acts, that thou do no hurt to thyself
nor another, nor, above all, to the race of men; but shalt strive with
thy might to increase the worth of each and all.
 II. Sexual Ethics
Everything that we have up to the present said of ethics and the
social sense in general applies also to sexual ethics in particular.
The only essential thing is to discuss the matter without prejudice,
and to put aside the ancient traditions of mystagogy, dogma, and
custom. This should be comparatively easy when we consider our
present-day conventions, hypocritical as they are to the point of
nausea, and the manner in which they support the right of the
stronger and other rank abuses under the false cloak of morality.
In itself the sexual desire is neither moral nor immoral. It is simply
an instinct adapted to the reproduction of the species. The common
confusion of sexuality with immorality is, I repeat, entirely erroneous.
A man without sexual feeling must of course be extraordinarily
“moral” in his sex relationships, and yet he can be the greatest
scoundrel imaginable. His sexual coldness and indifference have not
the smallest ethical value.
According to the definition given above, we may classify every
sexual desire as ethically positive if it is of benefit to individuals, to
society, and especially to the race (that is, to posterity); as ethically
negative if it does injury to any or all of these; and as ethically
indifferent if it neither does injury nor is of any service. At the same
time we must observe the ethical gradation: (1) the race, (2) society,
(3) the more intimate surroundings or family, and (4) the individual
self.
When we come to examine the concrete cases more closely we
find that the circumstances attendant upon the gratification of the
sexual desire, and the consequences of this gratification, lead to
conflicts with morality far more frequently than does the sexual act
itself.
In the first place even the normal reproduction of human beings
may become immoral, in that it may do injury to the race or to
individuals. Malthus pointed out this fact. Habitable space upon the
earth is limited, while, on the other hand, the procreative capacity of
mankind is unlimited. If unlimited reproduction is permitted, it is
possible that the existing space may be insufficient to meet the
needs of the enormous multitudes of men which must result. The
latter may then fall victims to famine and distress, as in the case of
the Chinese, or the rabbits of Australia; and only disease, starvation,
or slaughter can bring about a return to the normal condition. It must
be obvious to every unbiassed person that this is not moral. And as
there are harmless methods of regulating the number of births and to
some extent the quality of the offspring, the just and proper use of
these methods must be described as ethically positive. Everything is
moral which makes for the happiness and well-being of society;
everything immoral which prejudices or endangers it.
There can, however, be too few people in the world; and there is
everywhere a great dearth of men and women wholly sound in mind
and body, light-hearted, unselfish, industrious, persevering,
intelligent, able and yet well-intentioned, peaceable, and honest.
On the other hand, we have a monstrous superabundance of
feeble, sickly, mentally perverted, criminally disposed, idle,
treacherous, vain, crafty, covetous, passionate, capricious, and
untrustworthy individuals, whose claims upon others are
inexhaustible, while their own services to society are either valueless
or actually harmful.
While the first-mentioned class produce far more than they
consume, it is appalling to think of the vast store of human energy
and human life which goes to waste in sick-rooms, lunatic asylums,
hospitals, and prisons. And if we look more closely we find outside
these institutions, and under no restraint, a still vaster army of
human sharks, who prey physically and mentally upon society, and
are a burden upon the industrious community. The greater number of
these useless pests owe their faults to an hereditarily defective
constitution of the protoplasmic germs which brought them into
being; and therefore a sound system of racial ethics demands
rational selection in breeding.
Equally destructive, however, are external conditions and habits of
life, such as the use of alcohol, resulting as they do in paralysis of
energy, confusion of the mind, and degeneration of the cells
(blastophthory).

The libido sexualis, or sexual desire in mankind is infinitely

stronger than is necessary for the reproduction of the race. Man has
no breeding season; he is always ready for sexual intercourse.
Although the number of women in the aggregate only slightly
exceeds that of men, the male has usually an instinctive inclination
to polygamy. Luther accurately estimated the normal requirements of
a healthy man in the prime of life at on the average two to three
sexual connections in each week; and yet this is far in excess of
what is necessary for the procreation of children in a monogamous
marriage. It is, moreover, well known that a man can even
considerably exceed the above number without injury to his health,
and there are women whose needs in this respect are actually
greater than those of men.
It therefore follows that the widespread artificial excitement of the
sexual desire from motives of sensuality is harmful from the
standpoint both of ethics and of social hygiene.
We cannot, it is true, be held responsible for a natural instinct
inherited from our ancestors. But we must seek to subdue this
instinct as far as possible, not to excite and stimulate it by artificial
means. Already there is more than enough purposeless, and
therefore ethically indifferent, sexual intercourse.
And yet Tolstoy is wrong in wishing to forbid this. As long as it
does no actual harm we must tolerate it, the more so because the
happiness of the individual and the cheerfulness with which he
labours are so often dependent upon the normal satisfaction of his
instincts.
Within the limits indicated above, the gratification of the sexual
instinct, whether in the case of man or woman, is in itself ethically
indifferent, provided it does not result in the procreation of children.
We have already dealt with the ethical value of procreation, which
depends upon the nature of the results expected. And we are
therefore bold enough to declare that every sexual connection which
does not injure either of the two persons who take part in it, or any
third person, and which, moreover, can do no injury to the child
which may be engendered by it, is in itself ethically indifferent, and
cannot therefore be immoral.
We have certainly imposed considerable modifications in this
sentence, for it is possible for a perfectly normal sexual connection
to do untold injury, especially to the woman and the child she bears;
so that an act which is in theory not immoral may become so in
practice, or may give rise to grave moral conflicts. This often
happens at the present time as the result of our prejudices,
established customs, and unjust laws.
From the standpoint of sexual ethics the ideal marriage is
undoubtedly a monogamous union, resting upon mutual and
enduring affection and loyalty, and consummated by the birth of
several children; a union in which the husband may be from six to
twelve years older than the wife, and both must be robust in mind
and body.
This ideal state of things is not as rare as our modern pessimists
would have us believe, but neither is it especially common.
Moreover, if this marriage is to reach that perfection which it can and
must attain, it must be completely free, that is to say, both parties
must be absolutely equal before the law, and no external compulsion
other than that of common obligations towards the children must
bind them to one another. To this end a complete separation of
property, and a just and proper valuation of every service performed
by the wife as well as the husband are of the first importance.
From the aforesaid it must by no means be inferred that every
person is to yield without restraint to his sexual desires.
Unfortunately this fundamentally false conception of free marriage
and free love is at the present time widespread, and it cannot be too
vigorously combated. In the first place, two persons are concerned in
the sexual act, and any exercise of constraint by one upon the other
is immoral and even criminal. The same holds true of every
seduction.
 Moreover, the highest freedom of man lies in his mastery of self.
The only man who is truly free is the man who is able to control his
lower instincts. The compulsion which must be exercised in a
mutually happy sex relationship conformable to ethical principle
must, however, be no external legal compulsion, but an inward self-
repression. Fidelity in marriage must be a matter of mutual trust and
yet a matter of honour. The State and the laws cannot compel it, and
have never been able to do so; external constraint begets only
hypocrisy, strife, and treachery. On the other hand the State and the
law must, as time goes on, become more and more adapted to the
protection of the helpless offspring of sex unions.
Both parents, in proportion to their fitness and ability, must be
made responsible for the support of their children. It is in the highest
degree immoral to make a distinction between legitimate and
illegitimate children, and so to expose them and their mothers to
public disgrace because of the fulfilment of a natural function. Is it
not senseless, from the standpoint both of ethics and of law, to
declare the existence of a child, and therefore of a human being, to
be legal or illegal, or to speak of “natural children,” as if the others
were unnatural! In what bureaucratic brain can such an idea have
first arisen? It is only a remnant of a barbarous code of morals,
based upon the grossest prejudice. Antiquity, alas, justifies
everything—even crime!

Every woman who is healthy and strong should be proud of

becoming a mother. If sexual intercourse were frankly and naturally
treated as one of the most important acts in human life, the paternity
of the child would be easily ascertainable. A woman should not wait
until the birth of the child before speaking of it, but should promptly
make a formal declaration as to its parentage to the registrar of
births as soon as she becomes aware of her pregnancy. This would
be easily practicable if all girls received proper instruction regarding
the most important function of their lives. Instead of this, everything
is now concealed from them, and they are brought up in gross
ignorance of their sexual nature and duties.
 If every pregnancy were at once legally recognised in this way,
and if the law would determine the responsibilities of both parents
towards their offspring, untrammelled by marriage laws and with the
well-being of society as its only aim, the most pressing need of our
time, from the standpoint of sexual ethics, would be satisfied. A
complete equality can only be attained by naming all children after
the mother. This is, moreover, the only rational and just system. It
was formerly the custom among many primitive peoples.
None of these reforms, however, need in any way debar the
formation of voluntary marriage contracts. Such contracts are,
indeed, distinctly advisable, for the voluntary resolve of two people to
remain faithful to one another, and to build up a permanent home for
their children, is at once the best, truest, and most natural foundation
of marriage.
But no one can foresee the future, and therefore simple facilities
for divorce must be provided in case it becomes intolerable or
inexpedient for the two persons to live together any longer. A divorce
must take place if one or both of the parties wish for it. The State and
the Law must only have the right to demand the fulfilment by the
parents of all obligations towards their children. Marriage contracts
for a fixed period are therefore as such not immoral. Such
agreements have even been recommended by the Christian
philosopher Charles Secrétan, in his book Le Droit de la Femme.
Sterile marriages, or other sex relationships, must be free. The law
has no concern with them as long as they do not involve injury to any
one’s property, health, or personal will. They are in themselves
ethically indifferent.
On the other hand, all sexual intercourse which is bought or sold,
such as marriage for money, the keeping of paid mistresses, and the
whole system of prostitution, is immoral, because it is corrupting and
devoid of love, and amounts simply to plunder by the aid of money.
Prostitution is a hotbed of sexual vices and abnormal practices. By
its means the sexual instinct is perverted and led astray into every
imaginable bypath, while women are degraded in the basest of all
slaveries.
 Most repulsive of all, from the point of view of ethics, is the trade in
prostitutes known as the “white slave traffic,” with its criminal devices
for the enticement, intimidation, and seduction of young girls. The
traffic in waitresses for cafés and beer-gardens is often little better. It
is sad enough to reflect that these loathsome outgrowths of sexual
immorality often still enjoy the protection of the State, and that many
medical men defend their continuance under the pretext of hygiene.
It is just in this very respect that we see that social hygiene and
ethics are one and the same thing. Only the idiotic one-sidedness of
your specialist could declare such a monstrosity as State-established
prostitution to be hygienic. A system which makes for the mental and
physical ruin of the race cannot be hygienic, and the delusion that by
its aid men are protected from venereal disease is in direct conflict
with the actual facts.
Moreover, sexual intercourse which is bought and sold has no
relation to love. As a mode of gratifying the sex instinct it stands
even lower in the moral scale than the habit of self-abuse. And any
man who makes use of prostitution becomes an accomplice in
creating this miserable class of outcasts whom we speak of as
“unfortunates.” In short, whoremongery and prostitution are a social
cancer, and therefore in the highest degree immoral. They furnish an
instance of the manner in which money corrupts our whole
civilisation. This corrupting influence, with its robbery of one man by
another, makes itself felt in every department of life, and is exercised
by every form of private capital.
The climax of immorality in the cult of Mammon is reached,
however, by the capital employed in maintaining the two great evils
of alcohol and prostitution, both of which act as bloodsuckers upon
the vitality of the individual, the race, and all that is holiest in men.
These two forms of capital work hand in hand, fashioning the
goddess of love in the likeness of a lewd, sordid harlot, with the man
as at once her ravisher and her victim. They are also the worst
enemies of our descendants, whose procreation is often undertaken
in a moment of intoxication, and whose lives are exposed to the risk
of alcoholic degeneration or venereal disease!
 These, therefore, are the chief foes of sexual morality: the struggle
for wealth (as exemplified in the domination of private capital) and
the use of alcohol. Let us combat both in the name of ethics. “In hoc
signo vincemus!”

The following will, I hope, make my meaning still clearer.

In sexual ethics many diseases and abnormalities play, of course,
a great part. First of all there are the venereal diseases, and
particularly syphilis and gonorrhœa, which often destroy family
happiness and endanger the offspring. It is too often forgotten that
chronic gonorrhœa can poison marriage, and that decay of the
spinal marrow (locomotor ataxia) and the so-called softening of the
brain (progressive or general paralysis) are nothing else than a very
late result of syphilis, appearing from ten to twenty years after
infection.
In a brief statistical discussion of the question, based upon
medical information, I have shown that seventy-five per cent of
venereal infections are acquired while in a state of alcoholic
excitement. In the vast majority of these cases the infection is
communicated by means of prostitution, which, as the result of the
incredibly numerous and varied sex relationships of the women,
serves simply as a vast manufactory of venereal diseases.
It is true that married women are often infected by their husbands
or lovers, but this is only a result of the previous visits of the latter to
houses of ill-fame. Hygiene and morals both suffer serious injury in
this way. Any one who is infected, and nevertheless has sexual
connection with a person not infected in the same way, commits a
basely immoral act, if not a crime. This is done, however, daily, when
the infection is concealed. Nay, more, the medical men who officially
visit and examine prostitutes are well aware that they can at most
only temporarily remedy a few of the worst symptoms, and that they
are powerless to cure the disease itself. In spite of this such women
are set at liberty once more to carry on their disastrous trade! And
very few prostitutes ever completely escape venereal infection.
 These are the fruits of paid “love,” maintained chiefly by the
drinking habits of the present day. It is plain that the chief task of
sexual ethics must be the cleansing of this Augean stable. There are,
however, a host of other social evils of a similar kind, such as the
seduction and exploitation of waitresses, women factory workers,
and so forth. These abuses belong to the same domain and present
the same opportunities of infection.

The various perversions of the sexual instinct constitute another

prolific source of disaster. Most of these are hereditary, and therefore
inborn. We will only briefly mention sadism (the combination of acts
of cruelty and violence with sexual gratification), masochism (sexual
gratification combined with the passive endurance of similar cruelty
and violence), inverted sexual feeling (homosexuality), fetishism
(sexual attraction for inanimate objects), exhibitionism, sodomy, etc.
The unfortunate people who suffer from these perversions are
treated unjustly and, for the most part, far too harshly. Perverse
instincts which injure no one when carried into practice (fetishism, for
example), are ethically indifferent and harmless, in that their
possessors, generally speaking, do not multiply. It is, however,
immoral for such persons to marry. Any one who suffers from an
hereditary perversion of the sex instinct should avoid marriage and
all procreation of children.
But if the pervert can only gratify his instinct by injuring other
people, he must be regarded as a dangerous lunatic, and placed
under curative treatment. There must, however, be no question of
legal punishment. The foregoing treatment is above all necessary in
the case of sadists (who frequently commit murder) and in that of
persons of unsound mind who violate children. Homosexual persons
(i.e. men or women whose sexual inclination is for their own sex)
are, on the other hand, comparatively harmless as long as they
direct their attentions to adults, and provided there is no seduction or
use of compulsion. The same holds good in the case of other
perversions such as inclination for animals. Our laws are still entirely
at fault in these matters, and inflict punishment upon the basis of
ancient theological dogmas.
The case of perversions acquired by suggestion, evil example, or
frequent repetition is somewhat different. These latter are much
more readily curable.
Perverted sexual habits often arise from a craving for variety, or as
makeshifts adopted when the opportunity for normal sex intercourse
is denied. Our efforts must be directed towards removing these
causes by raising the general standard of social morals.
Religious morality has been the cause of untold mischief in this
matter of sexual perversions by representing as great sins and
crimes actions which are in reality the result of a diseased mental
state.
The habit of self-abuse is also extremely variable in its origin. It
arises usually as a makeshift, but often as the result of evil example.
It may also (although less frequently) be inherited, or originate from
nervous trouble, while in other cases it is prompted by mechanical
causes (phimosis, worms, or gymnastic exercises). There is no
greater blunder than that of exaggerating its importance by
representing it as a horrible and extremely dangerous vice. It must
be cured by pacification and soothing, by strengthening of the will,
and in some cases by providing the means of normal sexual
intercourse (not, however, by means of prostitution). This is the only
proper treatment of self-abuse, which is not as dangerous as is
commonly maintained. In this, as in all other cases, our conception
of sexual ethics will point out the right path.

Abnormalities of the brain or mind, especially constitutional

(hereditary) mental inferiorities, such as weakness of will-power,
moral idiocy (inherent lack of conscience), epilepsy, hysteria,
hypochondria, kleptomania, etc., together with all acquired mental
troubles, are the cause of innumerable sexual disorders and
perversions; of vices, crimes, and misdeeds of every description; of
rapine and seduction; of unhappy marriages, or rather hells upon
earth; and of the birth of countless doomed and wretched children.
Here we may see once again that ethics and social hygiene are at
one. Until now the theologians and the lawyers have treated these
mental conditions by denouncing them as deadly sins and
imprisoning the unhappy victims. This is disastrous to morality, to the
unfortunate persons themselves, and to society at large. Expert
mental treatment with a view to a fundamental cure is the first
necessity.
Here, again, alcohol and narcotics in general are the stone which
sets the whole avalanche in motion. The use of alcohol produces
mental inferiorities by its corrupting influence upon the cells
(blastophthory), and many people whose weakness of mind is
traceable to this cause cannot resist its use, and so become
dangerous inebriates.
Once more, it is the source and fountain of the evil that must be
stopped.
But there are other hereditary diseases and degeneracies of every
kind, not only of the brain, but of the whole body, such as the
disposition to tuberculosis, rickets, short-sightedness, and diseases
of the blood, all of which are related to sexual life and morals,
because they are all more or less injurious to the individual and to
society.
If persons suffering from such diseases have children at all they
must proceed with the greatest caution, and they should always be
instructed as to the hereditary nature of their maladies and the risk of
their transmission.

And now can we not hear the dictates of a truly human moral
code, based upon the facts that we have just considered?
It is true that we cannot change the present hereditary nature of
man, but it is none the less our duty, now that Science has revealed
this nature to us, to prepare for our posterity a greater degree of
happiness and a higher standard of social life than we now possess.
To this end we must first strive with all our might to destroy the all-
corrupting supremacy of private capital and wealth, with its
exploitation of human life and energy; and we must further combat
the use of all narcotic poisons, especially that of alcohol.
We must not rest until these two deadly monsters are overthrown.
In the sphere of sexual life we must endeavour to replace by truth
and justice the present-day hypocrisy which parades under the false
banner of “morality.” We must also restore to woman the same
natural and equal rights possessed by man.
Moreover, we must no longer be content to remain indifferent and
idle witnesses of the senseless and unthinking procreation of
countless wretched children, whose parents are diseased and
vicious, and whose lives are for the most part destined to be a curse
both to themselves and their fellow-men.
We must therefore recommend to all persons who are sickly or
infirm in body or mind, and especially to all suffering from hereditary
ailments, the use of means for the prevention or regulation of
conceptions,[D] so that they may not, out of pure stupidity and
ignorance, bring into the world creatures doomed to misery and
misfortune, and predisposed to disease, insanity, and crime.
[D] We refer, of course, to such preventive methods as are
completely harmless to the persons making use of them. Methods
for the prevention of conception, in general fulfil this condition.
We must endeavour in this way to bring about a vast and universal
sterilisation of all worthless, incapable or diseased people, without
attempting to prohibit in an ascetic and impracticable manner the
gratification of their normal sexual instinct and their desire for
affection.
The qualification for parentage must not be the possession of a
certain amount of money or property, but solely the social worth and
intrinsic hereditary qualities of the two individuals.
The multiplication of all who are healthy, capable, and ethically fit
must be encouraged as far as possible.
 An excessive frequency of childbirths in the case of one woman
must be prevented and regulated by the use of the means
mentioned above.
In this way we shall carry out a true racial selection and prepare
the way for a better and happier Humanity. And so at last we shall
have brought our true sexual ethics into living being and reality.
 Royal 8vo, 550 pp.
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THE SEXUAL QUESTION.

A SCIENTIFIC, PSYCHOLOGICAL, HYGIENIC, and
SOCIOLOGICAL STUDY for the CULTURED CLASSES.

By AUGUST FOREL, M.D., Ph.D., LL.D.

Formerly Professor of Psychiatry and Director of the Provincial
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