MA Econometrics II: Midterm 2019

Instructor: Bipasha Maity

Ashoka University Spring Semester 2019

March 13, 2019

All questions need to answered. Total points = 30. Time: 1 hr 30 mins.

Question 1: Total: 10 points; each worth 5 points

(a) Consider the following demand-supply system:

Demand: Qd = βod + β1d P + U d

Supply: Qs = βos + β1s P + U s

Here: Qd = quantity demanded; Qs = quantity supplied & P = price. In equilibrium,

Qd = Qs = Q

Show that the demand-supply equations cannot be consistently estimated using OLS.

(b) Consider the following labour supply model for married women:

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Hoursi = βo + β1 Childreni + Xi Γ + Ui

Here, Hours = hours of work; Children = number of children; X = any other factors
that can influence hours of work.

Can the effect of family size on hours worked be consistently estimated using OLS?
Argue in favour of your answer (use equation(s) in your argument as well).

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 Question 2: Total: 10 points

Consider the population regression model: y = β1 x1 + ... + βK xK + u. Suppose, xK

is the only endogenous explanatory variable in the model. Let z1 , ...., zM be M potential
instruments for xK . Let x = (x1 , ..., xK ) and z = (x1 , ..., xK−1 , z1 , ...., zM ). You can
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assume that x1 = 1 to allow for intercept. Assume that E(z z) is non-singular.

(a) Suppose x∗ = (x1 , ..., xK−1 , x∗K ) is the linear projection of each element of x on z.
Then, how can one write x∗K ? (Total: 2 points)

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(b) One can then write x = x∗ + r. What is E(z r)? What is the relationship between
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E(z x) and E(z x∗ )? (Total: 2 points)

(c) Suppose we can write x∗ = zΠ. Here, Π is L × K matrix (L = K + M ). What is

Π? (Total: 3 points)

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(d) Show that E(z x) has rank K (if certain conditions hold). Clearly specify under
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what condition(s) will E(z x) have rank K. (Total: 3 points)

Question 3: Total: 10 points

A researcher wishes to investigate how minimum drinking age legislation affects mo-
tor vehicle accidents due to drunk driving. Suppose minimum drinking age legislation
makes it illegal to sell alcohol to anyone below the age of 21. Suppose the researcher is
planning to use a sharp regression discontinuity design for evaluating the legislation.

(a) Write down the estimation equation and explain all the notation that you use.
(Total: 4 points)

(b) Suppose minimum drinking age legislation imply that drunk driving increases
after age 21. Draw a graph (as you would if you were to perform this RD exercise) to
demonstrate this. (Total: 3 points)

(c) What is the key assumption for identification in this RD set up? How would you
check for the validity of the RD design? (Total: 3 points).