ECON 136: Econometrics Syllabus

Melissa Tartari January 14, 2013

Administrative Details
Lectures: TU/TH 2:30-3:45pm, William L. Harkness Hall room WLH 117 (100 Wall Street). Website: https://classesv2.yale.edu/portal; announcements will be used in place of emails and a student s responsibility to check daily for announcements. Calendar: the rst day of class is TU January 15; the last day of class is TH April 25; the rst lab session will be exceptionally on Friday January 18, 4:00pm-5:00pm and 5:00-6:00pm; the midterm exam is scheduled for March 7, during lecture time; the nal exam is scheduled for May 5 (time and location TBA). Instructor: Melissa Tartari, melissa.tartari@yale.edu, 203-432-9536. Instructor s O ce Hours: TH 10:40-11:50am and 1:10pm-2pm, room 34, 37 Hillhouse Avenue (3rd oor). TF: Richard Langford, richard.langford@yale.edu, room 20, 37 Hillhouse Avenue (2nd oor). TF s Sessions: M 4:00pm-5:00pm and 5:00-6:00pm1 ; Statlab, Kline Biology Tower, 219 Prospect Street, CSSSI (http://statlab.stat.yale.edu/about/hours.jsp). TF s O ce Hours: TU and W 4:00-5:00pm, economics lounge, 28 Hillhouse Avenue (basement).

Overview of the Course

The course provides a working knowledge of the methods and principles of econometric theory and practice. Econometrics is based upon the development of statistical methods for estimating economic relationships, testing economic theories, and evaluating and implementing government and business policy. Econometrics has evolved as a separte discipline as mathematical statistics because it focuses on the problems inherent in collecting and analyzing non experimental data, namely, data not accumulated through controlled experiments on individuals. As of late social experiments have become more common and econometricians have developed methods that are suited to this data as well. What is the philosophy of the course? We will develop some theory in class but the primary emphasis will be on a sequence of specic problems/questions involving the specication and estimation of models of economic behavior. Two features set this course apart. First, we will often take these problems/questions from high impact academic articles, which we will study in depth. Specically, we will look into the issue of how to quantify the ceteris paribus eect of training on labor market outcomes, the eect of family size on female labor supply, the eect of unearned income on earnings and consumption, and the eects of time limits on assistance program take up. The journal-centered approach is ideal for students considering graduate school. The second feature of this course is the great emphasis it places on hands-on-learning. This is because students will carry out a series of assignments that involve the estimation of econometric models using actual data and the programming language of the statistical software STATA.
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Which are the topics covered? We start with a review of the bivariate linear regression model and quickly move to the multivariate linear regression model. Within this context we characterize the Ordinary Least Square (OLS) estimator and the Maximum Likelihood (MLE) estimator. We then relax one by one the assumptions under which the OLS estimator has desirable properties. In so doing, we introduce other estimators such as the Instrumental Variable (IV) and the Two-Stage Least Square (2SLS) estimators as well as the First-Dierence (FD), the Fixed-Eect (FE), and Random-Eect (RE) estimators. We conclude with an introduction to models for limited dependent variables: the linear probability model, the Logit model, and the Probit model. Taken together, the econometric methods reviewed are suited to work with cross-sectional data, independently pooled cross sections, as well as panel-data. They are also suited to be applied to, depending on the method, experimental data and observational data.

Course Requirements

Econometrics 136b follows 135a (Introduction to Probability and Statistics) or STAT 241a and 241b.

Textbooks, JArticles, Software, and Lab Sessions

Textbooks We will use one textbook: Jerey Wooldridge, Introductory Econometrics: A Modern Approach , 5th Edition, South-Western College Publishing Company. Older editions are OK. Journal Articles We will read and work on four journal articles, they will be the object of assignments and of student presentations and written nal reports: 1. (Economics and Econometrics) Guido W. Imbens, Donald B. Rubin, Bruce I. Sacerdote (2001) Estimating the Eect of Unearned Income on Labor Earnings, Savings, and Consumption, The American Economic Review, Vol. 91, No. 4 (Sep., 2001), pp. 778-794. 2. (DD and Randomized Experiments) Grogger and Charles Michalopoulos (2003) Welfare Dynamics under Time Limits, The Journal of Political Economy, 2003, vol. 111, no. 3 3. (IV and natural experiments) Joshua D. Angrist and William N. Evans (1998) Children and Their ParentsLabor Supply: Evidence from Exogenous Variation in Family Size, The American Economic Review, Vol. 88, No. 3 (Jun., 1998), pp. 450-477. This article is read in conjunction with Mark R. Rosenzweig and Kenneth I. Wolpin, Natural "Natural Experiments" in Economics, Journal of Economic Literature, Vol. 38, No. 4 (Dec., 2000), pp. 827-874. [Note: in the rst article you can skip section III. Comparison with Estimates Using Multiple Births, in the second article you should only read section I. Introduction and section 5. Estimating the Eect of Children on Female Labor Supply] 4. (Non Linear Models and Observational Data) David Card and Daniel Sullivan (1988) Measuring the Eect of Subsidized Training Programs on Movements in and out of Employment, Econometrica, Vol. 56, No. 3, May, 1988. [Note: you can skip the section called APPENDIX] Online Material We will use the yaleclasses*v2 software. You can log-in at https://classesv2.yale.edu/portal. You should use the calsses*v2 website to check the schedule of the course, to download data sets, assignments, lecture notes, to access the class forum, let me know your opinion/concerns about the course, point out typos in the lecture notes, to access your grades, to read the annoucements. All documents that need to be typed, namely the nal report, the slides of the presentation and of the discussion, shall be uploaded using the Dropbox function at the classesv2 site. Statistical Software and Documentation We will use STATA, an integrated statistical package for Windows, Macintosh, and Unix. STATA is a full data-management system with complete statistical and graphical capabilities. STATA is installed on the computers at the Stat lab. If you prefer to run STATA on your laptop you can purchase it quite cheaply through GradPlans: http://www.stata.com/order/new/edu/gradplan.html. The current version is called STATA 12. A recommended book is the user manual by C. Baum An Introduction to Stata Programming , STATA Press, 2009. This is a ne book especially if you plan to use STATA in the future. However, most of what you will need to learn about STATA and the STATA programming language can be accessed from within STATA. 2

You can look up a command from within STATA by typing help followed by the name of the command in the command line. From within STATA you can also access all the STATA user manuals in .pdf format. Of particular relevance are two of the manuals: [U] User s Guide and [P] programming. Alternatively, good online sources of information are the site http://www.ats.ucla.edu/stat/stata/ or simply googleing STATA followed by the name of a command or a keyword, for instance, searching for STATA regression should direct you to http://www.stata.com/help.cgi?regress. Lab Sessions The TF will hold lab sessions on a weekly basis. Lab sessions are of two types. The rst type consists of STATA tutorials: the TF teaches students how to use the software STATA. Thanks to these lab sessions you learn how to carry out the empirical assignments. Please remark that STATA will not be taught during standard lecture time. This means that unless you already master STATA you should attend the lab sessions that provide STATA tutorials. The second type of lab sessions consists of more standard meetings during which the TF covers material that, due to time-constraints, was not covered or partially covered in class, reviews material that was covered in class but that appears to require some additional time/attention, reviews the solutions to the assignments, answers questions raised by the students on topics of their choice, and solves sample exercises in preparation for the exams. The TF will likely hold up to 13 lab sessions. Additional lab sessions may be scheduled right before the midterm or the nal exam if enough students request them, for instance in place of o ce hours.

Grading
1. Mid-Term Exam (25% of nal grade) 2. Homework assignments (30% of nal grade) 3. Final Report (5% of nal grade) 4. Presentation (7.5% of nal grade) 5. Discussion (2.5% of nal grade) 6. Final Exam (30% of nal grade)

The nal grade of the course will be based on the following items:

Homework Assignments Homework assignments will be handed approximately weekly: you should expect the following 10 assignments: 1. Basic Statistics and Probability, with STATA (due January 24) 2. Simple Linear Regression, with STATA (due January 31) 3. Multivariate Linear Regression, with STATA (due February 7) 4. Testing, Omitted Variables, Non Linear Least Squares (due February 28) 5. Linear Probability Models, with STATA (due March 7) 6. Instrumental Variables, with STATA (due March 28) 7. Imbens, Rubin, and Sacerdote (due March 28) 8. Grogger and Michalopulos (due April 4) 9. Angrist and Kruger, Rosenzweig and Wolpin, with STATA (due April 11) 10. Card and Sullivan, with STATA (due April 18)

You are strongly encouraged to form groups of a maximum of 4 students and work on assignments jointly. Each group should submit only one homework; make sure that it lists the names of all of the students in the group. Due dates are non-negotiable. Each assignment provides detailed instructions as to how to submit your solutions. Each assignments is graded on a 0-100 scale. How will the assignments look like? Some assignments will ask you to carry out statistical analysis in STATA by using some of the data sets provided. Some assignments will ask you questions pertaining to one or more of the journal articles listed above. Some assignments will contain multiple-choice or True/False questions as well as exercises that require algebraic derivations and mathematical proofs. Midterm and Final Exams The mid-term and nal exams are closed books and closed notes. There is no make-up date for the midterm exam. You are allowed to bring a cheat sheet: you may ll the top half of one A4 sheet (one side). We will seize cheat sheets that do not conform to this requirement. The midterm exam is scheduled for March 7, in place of the lecture, and lasts 1 hour plus 15 minutes to review your work. The nal exam is held on May 5, last 2.5 hours plus 30 minutes to review your work. How will the exams look like? Their content will look very much like the content of the assignments and there may be brief questions conerning the use of STATA commands or the interpretation of STATA estimation output or of brief scripts. For instance, we may give you 20 lines of STATA code and ask you to describe in words what those line accomplish or to nd a bug/mistake. Presentation, Discussion, and Final Report There will be four 20 minute in-class presentations given by the students. Each presentation focuses on one journal article chosen by the students from the list above or randomly assigned. The presentations are scheduled for April 23 and 25, two presentations per lecture. Students shall form four groups and the members of each group will collaborate on the presentation, both in preparing the slides and in presenting. Each member will also independently write and submit a critical report on the journal article that his or her group presents. The reports and the slides of the presentation are due on the day of the presentation. Each group is also in charge of discussing the article presented by another group, on alternate dates. The discussion should take at most 5 minutes and be done by a selected member of the discussing group of students. The presenting group will then have 5 minutes to respond to the questions raised by the discussants. The slides of the discussion are due on the day of the discussion and will be evaluated on the relevance, deph, originality, and clarity of the questions and remarks they contain. How will the presentation look like? I will soon post detailed instructions at the classesv2 site. You will have to prepare slides, convert them to .pdf format, and present them in front of the other students, the instructor, and the TF. Plan for a presentation that lasts 20 minutes. Please make sure that you 1) schedule a mock presentation with the TF during his o ce hours any time before the day of your actual presentation so that he can provide you with feedbacks; 2) revise your slides based on the feedbacks and suggestions of the TF, 3) come to my o ce hours the week before the week of the presentation so that we can go over the revised slides together. How will the report look like? It should be approximately 2 pages in length, at most 3 pages, 12p, Times New Roman, and approximately 900 words in total; equations are allowed and do not count as words/space. The report should be written so that a person, who has not read the journal article but who is trained in econometrics at the level of this class, can understand what the authors do, what question(s) they address, how they address the questions (data and methodology), what is their contribution to the literature (aka what is new and original), what are the problems with their approach/data etc. A very imporant feature of the report is that it should be written so that it is self-contained: imagine that a partner at an economics consultancy rm asks you, the economist freshly trained in econometrics, to write a memo that digests on his behalf the (technical) journal article and that enables him to skip reading the article and still be able to rely on it in his expert deposition in a court of law. Writing the report is a task that will hone your ability to write clearly, succintly, and to the point about an expansive set of highly technical material. How will the discussion look like? The discussants should prepare two slides to form a .pdf document. At least one slide shall pose questions to the presenting group, the other slide may contain comments (appreciative or critical) of the journal article that may or may not correspond to questions.

Class Grade The letter grade assigned to you will be derived as follows. First, I aggregate the numeric 0-100 scores across the various components: N G = 30% where: F E is the 0-100 score on the nal exam, M E is the 0-100 score on the midterm exam, ASi is the 0-100 score on assignment i given NA assignments, RE is the 0-100 score on the nal report, P R is the 0-100 score on the presentation DI is the 0-100 score on the discussion. Second, I will use the following table to convert the numeric score N G into a letter grade: Letter Grade Numeric Grade F <40 D41-43 D 44-47 D+ 48-49 C50-54 C 55-59 C+ 60-64 B65-69 B 70-74 B+ 75-79 A80-89 A 90-100 F E + 25% M E + 7:5% P R + 5% F R + 2:5% DI +
A 30% X ASi NA i=1

Outline of the Course

The course consists of 26 lecture sessions and approximately 13 lab sessions. The following topics and chapters in Wooldridge s will be covered, though not necessarily in the order presented. 1. Some Preliminaries: Nature of Econometrics and Economic Data (Wooldridge: Chapter 1) 2. Linear Regression Analysis Numerical Properties of Least Squares (Chapter 1) Statistical Properties of Least Squares: Introduction to regression - Bivariate Linear Regression (Wooldridge: Chapter 2) Multiple Regression Analysis: estimation (Wooldridge: Chapter 3) Multiple Regression Analysis: nite sample inference (Wooldridge: Chapter 4) Multiple Regression Analysis: large sample inference (Wooldridge: Chapter 5) 3. Specication Issues (Wooldridge: Chapter 6) Data Scaling Specication of the regression function Model Selection 4. Heteroschedasticity (Wooldridge: Chapter 8) 5. Multiple Regression Analysis with Qualitative Information Dummy Explanatory Variables (Chapter 7) Dummy Dependent Variables: the Linear Probability Model (Chapter 7 and 8) 6. Specication and Data Problems (Wooldridge: Chapter 9) Functional form mis-specication 5

Omitted Variables Using Proxy Variables for unobserved explanatory variables Measurement error Instrumental Variables Estimation (Wooldridge: Chapter 15) as a way to solve: (a) Omitted Variables Problem Missing data, non random sampling and outlying observations 7. Pooling Cross Sections Across Time and Simple Panel Data Methods (Wooldridge: Chapter 13 and 14) Policy Analysis with Pooled Cross Sections Policy Analysis with Two-Period Panel Data Simple Panel Data Methods: First Dierence Estimator, Fixed Eects Estimator, Random Eects Estimator 8. Limited Dependent Variable Models Limited Dependent Variable Models and Sample Selection Corrections (Wooldridge: Chapter 17)