Econ 140 - Spring 2016

Section 12
GSI: Fenella Carpena
April 28, 2016

1 Experiments and Quasi-Experiments

Yi = β0 + β1 SmallClassi + β2 RegAidei + ui

where Yi is test score for student i, SmallClassi = 1 if student i is in a small class and 0 otherwise, and RegAidei = 1
if student i is in a regular class with an aide and 0 otherwise. How would you expect including T eacherExp (teacher’s
years of experience) as an additional variable would alter the coefficient on SmallClass: would it increase, decrease,
or stay the same? Explain.

Exercise 1.1. (Stock & Watson, Review the Concepts 13.1) A researcher studying the effects of a new
fertilizer on crop yields plans to carry out an experiment in which different amounts of fertilizer are applied to 100
different 1-acre parcels of land. There will be four treatment levels. Treatment level 1 has no fertilizer, treatment
level 2 is 50% of the manufacturer’s recommended amount of fertilizer, treatment level 3 is 100%, and treatment
level 4 is 150%. The researcher plans to apply treatment 1 to the first 25 parcels of land, treatment level 2 to the
second 25 parcels, and so forth. Can you suggest a better way to assign treatment levels? Why is your proposal
better than the researcher’s method?

Exercise 1.2. (Stock & Watson, Review the Concepts 13.2) A clinical trial is carried out for new cholesterol-
lowering drug. The drug is given to 500 patients, and a placebo is given to another 500 patients, using random
assignment of the patients.
(a) How would you estimate the treatment effect of the drug?
(b) Suppose that you had data on the weight, age and gender of each patient. Could you use these data to improve
your estimate? Explain.

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Exercise 1.3. (Stock & Watson, Review the Concepts 13.3) Researchers studying the STAR data report
anecdotal evidence that school principals were pressured by some parents to place their children in the small classes.
(a) Suppose that some principals succumbed to their children in the small classes. How would such transfers
compromise the internal validity of the study?
(b) Suppose that you had data on the original random assignment of each student before the principal’s intervention.
How could you use this information to restore the internal validity of the study?

Exercise 1.4. (Adapted from Stock & Watson, Exercise 13.4) Going back to the Card and Krueger (1994)
example, consider the difference-in-difference regression:
empit = β0 + β1 N Ji + β2 P OSTt + β3 N Ji ∗ P OSTt + uit
(a) In terms of coefficients β0 , β1 , β2 , β3 , what is the expected number of employees in:
(i) A New Jersey restaurant in 1991?
(ii) A New Jersey restaurant in 1993?
(iii) A Pennsylvania restaurant in 1991?
(iv) A Pennsylvania restaurant in 1993?
(b) In terms of the coefficients β0 , β1 , β2 , β3 , what is the average causal effect of the minimum wage on employment?
(c) Explain why Card and Kruger used the difference-in-difference estimator of the causal effect instead of the “New
Jersey after − New Jersey before” or the “1993 New Jersey − 1993 Pennsylvania” differences estimator.

Exercise 1.5. (Stock and Watson, Exercise 13.3) Suppose that, in a randomized controlled experiment of
the effect of an SAT preparatory course on SAT scores, the following results are reported:
Treatment Group Control Group
Average SAT Score (X) 1241 1201
Standard deviation of SAT score (SX ) 93.2 97.1
Number of women 55 45
Number of men 45 55
(a) Estimate the average treatment effect on test scores.
(b) Is there evidence of non-random assignment? Explain.

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2 Final Exam Review
Final Exam Spring 2014, Question 3. You are hired by the Government of Ghana to study the impact of
income on the level of education. Using data on rural villages, you estimate the following population regression using
OLS:
Educi = β0 + β1 Incomei + β2 P opi + β3 Schooli + β4 Agei + ui
where Educi is average years of formal education in the village, Incomei is average annual income per capita in
the village, P opi is the number of village residents, Schooli is the number of schools in the village, and Agei is the
average age of the village population.

(a) (5 points) Explain what econometric problem is likely to arise that leads to biased and inconsistent estimates as
a result of including Income as a regressor in the education regression as is done above.

You learn from Ghana’s Minister of Agriculture that the country’s citizens derive the bulk of their income from
agriculture. As a result, you cleverly infer that average annual rainfall (Rainf all) may be a good instrument for
income.

(b) (5 points) You recall from your econometrics course that an instrument can be used in a procedure called Two
Stage Least Squares that is designed to solve this econometric problem. Describe carefully the first of the two
stages and why TSLS will generate a consistent estimate of β1 .

You want to check the Minister’s suggestion that rainfall has an impact on incomes in Ghana. You have
information on average annual incomes in 1996 and 1997 for two regions: the “coastal region,” which had
the same precipitation level in both years, and the “hill region,” which experienced a 30% increase in rainfall.
Comparing 1996 and 1997, income in the coastal region fell from 124 to 104, while income in the hill region fell
from 98 to 96. You also recall from your econometrics course that this situation might represent a “natural” or
“quasi” experiment, allowing you to estimate the “treatment effect” of rainfall.
(c) (8 points) Perform a difference in differences analysis of the effect of rainfall on average income. Summarize the
analysis in a table.

(d) (6 points) Describe a multivariate regression that when estimated using OLS will generate exactly the same
estimate of the effect of rainfall on income as was generated by the analysis in part (c).

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(e) (6 points) Describe in detail one threat to the internal validity of the OLS estimates when treating these data
as a quasi-experiment, and how it would bias the coefficient estimate.

Final Exam Spring 2011, Question 5. In 1980, due to a temporary easing of Cuban emigration rules, there
was a huge influx of Cuban immigrants into the state of Florida. As a result of this so-called “Mariel boatlift,” the
low-skilled labor force of Miami increased by 7%. David Card compared the average hourly wages in Miami and
comparison cities (Atlanta, Houston, Los Angeles, and Tampa-St. Petersburg). The average hourly wages expressed
in logarithms are given in the below table:

Cities
Miami Comparison
1979 1.85 1.93
Year
1981 1.85 1.91

(a) (10 points) Calculate the percentage change in average hourly wages in the treatment group and in the control
group, and uses those changes to the differences-in-differences (“DiD”) estimate. Is the sign of the DID estimate
what would be predicted by economic theory? Explain.

(b) (10 points) Give an example of a relevant variable that is omitted from the DiD estimation, and predict the
likely bias it would cause.

(c) (12 points) To accommodate other determinants of metropolitan wage rates, you suggest including a measure of
the size of the metropolitan manufacturing sector Mi since it might reflect ability to absorb low-skilled workers.
Write down a linear regression that generates a DiD estimate while incorporating this control variable. Why
would you believe that this regression approach would change your estimate of the effect of the Mariel boatlift
from (a)?