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Multiple Regression
(SW Ch. 9)
Multiple regression has some key virtues:
It provides an estimate of the effect on Y of arbitrary
changes X.
It resolves the problem of omitted variable bias, if an
omitted variable can be measured and included.
It can handle nonlinear relations (effects that vary
with the Xs)
Still, OLS might yield a biased estimator of the true
causal effect.
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3. Errors-in-variables bias
So far we have assumed that X is measured without error.
In reality, economic data often have measurement error
Data entry errors in administrative data
Recollection errors in surveys (when did you start
your current job?)
Ambiguous questions problems (what was your
income last year?)
Intentionally false response problems with surveys
(What is the current value of your financial assets?
How often do you drink and drive?)
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Then
Yi = 0 + 1Xi + ui
= 0 + 1 X% i + [1(Xi X% i ) + ui]
or
Yi = 0 + 1 X% i + u%i , where u%i = 1(Xi X% i ) + ui
If X% i is correlated with u%i then 1 will be biased:
cov( X% i , u%i ) = cov( X% i ,1(Xi X% i ) + ui)
= 1cov( X% i ,Xi X% i ) + cov( X% i ,ui)
= 1[cov( X% i ,Xi) var( X% i )] + 0 0
because in general cov( X% i ,Xi) var( X% i ).
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Yi = 0 + 1Xi + ui
Xi = 0 + 1Yi + vi
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TestScore
= 744.0 0.64STR 0.437PctEL 0.582LunchPct
(21.3) (0.27)
(0.303)
(0.097)
2
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TestScore
= 655.5 + 12.4STR 0.680STR2 + 0.0115STR3
0.434PctEL 0.587LunchPct
2
3
3.48Income + 0.174Income 0.0023Income
Estimated reduction from 20 students to 18:
TestScore
= [12.420 0.680202 + 0.0115203]
2
3
[12.418 0.68018 + 0.011518 ] = 1.98
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4. Selection
Sample is all elementary public school districts (in
California; in Mass.)
no reason that selection should be a problem.
5. Simultaneous Causality
School funding equalization based on test scores
could cause simultaneous causality.
This was not in place in California or Mass. during
these samples, so simultaneous causality bias is
arguably not important.
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Summary
Framework for evaluating regression studies:
o Internal validity
o External validity
Five threats to internal validity:
1. Omitted variable bias
2. Wrong functional form
3. Errors-in-variables bias
4. Sample selection bias
5. Simultaneous causality bias
Rest of course focuses on econometric methods for
addressing these threats.
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