Team Members: Khawla Gharbi - Ranim Nasri - Malek Zouari - Arij Sayhi

Problem 1 (Wooldridge 2011, MIT PRESS)

a) We are allowing for aggregate time effects because capital investments is affected by other
external factors and not allowing them may create biased estimates in the model

b) ci is mainly captured for time-constant variables that may affect the model

c) Following a causal fashion , the more the taxes increases the more the investments
decrease

d) If we will be choosing the FE model : Study the Transformation method used to eliminate
ci and then use OLS for estimation
*Assumption 1 : Heterogeneity between Zit , tax it , disaster it and the error terms
*Assumption 2 : Correlation between explanatory variables ( time-varying ones ) and ci

e) If tax it and disaster it don’t affect lagged investment :

● Tax it : for the tax , it can be adjusted based on past experience or through future
assumptions so this may explain the endogeneity of tax it

● Disaster it : this may depend on the informations provided , if you already have
information that disasters and natural crisis is not affected by any economic condition ,
exogeneity is surely appreciated ( which is the majority of the cases ) but it happens when
we find a disaster that is caused by economic condition which explains the endogeneity
problem

Problem 2 (Wooldridge 2011, MIT PRESS)

a) The parameters in the log wage equation that can be consistently estimated are those that
can be isolated in a way that eliminates the unobserved individual effect ci.
- θ2​: This captures the effect of time on wages.
- δ2​: This captures how the effect of time on wages differs between men and women.
By differencing the equations, we eliminate the individual fixed effect cici​,
allowing us to estimate the parameters related to time variation and interactions with time.
The differenced equation removes ci and isolates θ2​and δ2​.
b) - θ2​: This tells us the average change in log wages from the first time period to the second
time period.
- δ2: This tells us how much more (or less) the change in log wages from the first to the
second period is for women compared to men.

c) log(wagei1​)= θ1 ​+ zi1 ​γ + δ1​female i​+ ci​+ui1​

log(wagei2​)= θ1 ​+ θ2 ​+zi2 ​γ+ δ1​female i​+ δ2​female i​+ ci​+ ui2​
log(wagei2​)−log(wagei1​)= θ2 ​+ (zi2​−zi1​) γ+δ2 ​female i​+ (ui2​−ui1​)
= θ2​+ Δzi​γ+ δ2​female i​+ Δui

d) To test H0: d2t = 0 with heteroscedasticity (non-constant variance), we need first to

estimate the differenced model which is the one determined in the previous question,
Δlog(wagei​) = θ2​+ Δzi​γ + δ2​female i​+Δui​. Then, we use Robust Standard Errors to
account for the non-constant variance of the error term. And finally, we perform the t-test.
Problem 3 (Wooldridge 2011, MIT PRESS)
Problem 4 (Wooldridge 2011, MIT PRESS)

A. Including d2t is important in these contexts, because without it we would be assuming

that any observed changes in the average outcome y between two time periods are only
due to the program without considering any external factors.The model would incorrectly
attribute the time effect to other variables and leading to biasing the estimates of the
treatment effect θ1\theta​, and it could lead to omitted variable bias, as the unobserved time
effect correlated with the program indicator progit would confound the estimated impact
of the program.

B. Including ci​(the unobserved effect) is important because it accounts for the time-invariant
characteristics of each unit that could influence the outcome yit​. If the unobserved effect ​
is not included, the omitted variable bias arises from any correlation between the
individual effect (ci)​and the program participation variable progit​, leading to inconsistent
estimates of the program effect θ1/theta.

C.
D. For T time periods, the model can be written as:

where dit are dummy variables for each time period t (excluding the base period).

E. For T>2, the unobserved effects model from part (D) is generally preferred over the
pooled estimation because it properly accounts for the time-invariant unobserved effects
ci​. The pooled OLS estimation does not control for these individual effects ( it ignores
individual effect), potentially leading to biased estimates if ci​is correlated with the
explanatory variables. The unobserved effects model explicitly includes these effects and
provides more consistent estimates of the program impact δ1.