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(1-7)
Therefore, proposition 3 implies that
1 1
2 2
or 0
inc inc
(1-8)
That is to say,
1
0 (1-9)
4
Once the model has been estimated, testing proposition 3 is equivalent to testing whether the
intercept is significantly greater than 0.
EXAMPLE 1.2 Wage determination
Economic model:
Formal economic theory - human capital theory- says that education (educ), experience (exper)
and training are factors that affect productivity and hence the wage. Therefore, an economic model for
wage determination could be the following:
( , , ) wage f educ exper training (1-10)
Incidentally, do you think there is any variable missing in this model?
Econometric model:
The corresponding econometric model, using a mathematical linear form, is the following:
1 2 3 4
wage educ exper training u (1-11)
To sum up, to convert an economic model into an econometric model:
a) The form of the function f(.) has been specified.
b) A disturbance variable has been included to reflect the effect of other variables
affecting wage, but not appearing in the model.
An important element in the specification of the model is the formulation of a set
of statistical assumptions, which are used in subsequent steps. These statistical
assumptions play a key role in hypothesis testing and, in general, throughout the
inference process carried out with the model.
(b) Estimation
In the estimation process we obtain numerical values of the coefficients of an
econometric model. To complete this stage, data are required on all observable variables
that appear in the specified econometric model, while it is also necessary to select the
appropriate estimation method, taking into account the implications of this choice on the
statistical properties of estimators of the coefficients. The distinction between estimator
and estimate should be made clear. An estimator is the result of applying an estimation
method to an econometric specification. On the other hand, an estimate consists of
obtaining a numerical value of an estimator for a given sample. For example, applying a
very simple estimation method, called ordinary least squares, to the specification of the
consumption function (1-4) provides expressions which determine the estimators
1
and
2
. Substituting the sample data in these expressions, two numbers are obtained:
one for
1