Econometrics II, Alena Bicakova

Assignment II
Deadline: May 25, 11.00 a.m.

1. A latent variable yi is generated by

yi = xi + i
where i is N (0, i2 ) and i2 = 0 + 1 x2i . We observe yi where
yi = 1(yi > 0) and xi . Write down the log-likelihood function of the
model, in terms of the parameters: 0 , 1 , and .
2. You have a cross-sectional sample of households with the information
about whether the household has an internet connection or not, and
whether it resides in an urban or a rural area. You are asked to
estimate the effect of the type of the residence area on the probability
of having an internet connection.
(a) Write down an underlying latent variable model of the propensity
of having an internet connection.
(b) Propose an estimation method: state the assumptions you make
and write down the formula defining your estimator. Which parameters of your model are identified?
(c) Derive the expression for the average effect of living in an urban
area on the probability of having an internet connection.

3. In an ordered probit model with four outcomes, you obtain

the following results: y = 10 + 50 x1 80 x2 , where = 100, and the
thresholds are 0 = , 1 = 100, 2 = 200, 3 = 300, and 4 =
P rob(200<y 300)

i
at x1 = x2 = 1 and at x1 = 1 and
(a) Evaluate
x2
x2 = 2. What is the effect of a corresponding unit increase in x2
(treating x2 as discrete) on P rob(200 < yi 300)?

P rob(y <100)

i
(b) Evaluate
at x1 = x2 = 1 and at x1 = 2 and x2 = 1.
x1
What is the effect of a corresponding unit increase in x1 (treating
x1 as discrete) on P rob(yi < 100)?

4. Use the dataset pension.raw to explore the pension plan portfolio composition chosen by the individuals in your sample.
(a) Explore the dependent variable pctstck, which indicates the prevalence of stocks rather than bonds in the portfolio. Tabulate the
distribution of individuals in the sample across the different values of pctstck.
(b) Estimate a linear model for pctstck, where the explanatory variables are choice, age, educ, female, black, married, finc25, . .
. , finc101, wealth89, and prftshr. Why might you compute
heteroskedasticity-robust standard errors?
(c) Estimate the model from part (a) by ordered probit. Estimate
E(pctstck|x) for a single, non-black female with 12 years of education who is 60 years old. Assume she has net worth (in 1989)
equal to 150,000 USD and earns 45,000 USD a year, and her
plan is not profit sharing. Compare this with the estimate of
E(pctstck|x) from the linear model.
(d) Answer question (c) using an ordered logit model and compare.
(e) Use the ordered probit and ordered logit models to predict for
each individual the most likely outcome of the dependent variable.
Compare the (unconditional) distribution of individuals across
the predicted outcomes based on the two models with the actual
distribution.
(f) Consider the ordered probit model from above. Based on the estimated coefficient of prftshr, what sign do you expect the effect
of having a profit-sharing plan (rather than not) to have on the
probability of having a mostly-bonds portfolio, a mixed-portfolio
and a mostly-stocks portfolio respectively? Compute the average
partial effect of having a profit-sharing plan on these three probabilities. [Hint: You can make use of the individual probabilities
predicted in STATA and adjust them accordingly for the correct
calculation of the effect for each observation.]
5. Based on Cameron and Trivedi textbook:
Use data fishing.dta to replicate the results in the second column of
Table 15.2 p. 493. Then re-estimate the model under column 2 using
a randomly drawn 80 % sub-sample of the original data and answer
questions to exercise 15-3 at the end of the chapter 15.
The data for this problem set are located at the local network at
\\wbox\f tp\LECT U RES\Y EAR 1\Econometrics II
Hint: look-up the following commands in STATA: oprobit, ologit, mlogit
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