MA Econometrics II: Midterm 2018

Instructor: Bipasha Maity

Ashoka University Spring Semester 2018

March 8, 2018

All questions need to answered. Total points = 70

OLS
Question 1: Total: 30 points

Consider a simple linear regression model: Yi = β0 + β1 Xi + Ui .

Here, β0 and β1 are unknown scalars; (Xi , Ui ) : i = 1, 2, .., n are i.i.d. Further,
E[Ui |Xi ] = 0 and E[Ui2 |Xi ] = σ 2 . Now, consider the following estimator:
β˜1 = (Yn − Y1 )/(Xn − X1 ). Here, (X1 , Y1 ) and (Xn , Yn ) are the first and last observations
respectively in the data. Further, suppose X1 6= Xn with probability 1.

(a)Is β˜1 biased or unbiased? Prove in support of your answer. (10 points)

(b) What is V ar(β˜1 |X1 , ..., Xn ) ? (10 points)

(c) Suppose βˆ1 is the OLS estimator of β1 . Prove that V ar(β˜1 |X1 , ..., Xn ) ≥ V ar(βˆ1 |X1 , ..., Xn )
(the computation should be shown clearly). (10 points)

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IV
Question 2: Total: 10 points

One occasionally sees the following reasoning used in applied work for choosing in-
strumental variables in the context of omitted variables. The model is y1 = z1 δ1 + α1 y2 +
γq + a1 ; q being the omitted factor. Assume that a1 satisfies E[a1 |z1 , y2 , q] = 0. z1 is
exogenous, that is, E[q|z1 ] = 0; but y2 and q may be correlated. Let z2 be the vector
of instrumental variable candidates for y2 . Suppose it is known that z2 appears in the
linear projection of y2 on (z1 , z2 ), that is, the requirement that z2 is partially correlated
with y2 is satisfied. Also, we are willing to assume that z2 is redundant in the structural
equation. What we are unsure of is whether z2 is correlated with q, in which case z2
would not contain valid IVs.
To “test” whether z2 is in fact uncorrelated with q, it has been suggested to use OLS
on the equation: y1 = z1 δ1 + α1 y2 + z2 ψ1 + u1 , where u1 = γq + a1 and test H0 : ψ1 = 0.
Why does this method not work?

Question 3: Total: 20 points

Suppose some researchers wish to study the impact of type of delivery place (home
versus hospital) on infant health outcomes. The structural equation is Yizt = β0 +
β1 Hospitalizt + β2 Xizt + izt , where unit of observation is the infant i born in year t to a
mother residing in the postal code z. Yizt is an outcome variable capturing infant health,
Hospitalizt is a dummy variable indicating that the birth occurred in a hospital, Xizt is
the vector of observable characteristics of the mother and of the infant.

(a) Can you interpret the OLS estimate of β1 as causal? Explain. (5 points).

(b) Suppose that the researchers (just to be cautious) also employ IV estimation
strategy. They propose to use distance between a mother’s residence and the nearest
hospital with an obstetric ward as instrument for Hospitalizt . If I tell you that the IV
strategy identifies the local average treatment effect (LATE), how would you define the
compliers? (5 points).

(c) Write down the first stage equation. How would you think about the exclusion
restriction in this case? Can you explain clearly what might lead to the violation of the

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exclusion restriction in this case? (10 points).

RDD
Question 4: Total: 10 points

A researcher wishes to investigate whether reduction in patient cost sharing at age 70

affects healthcare utilization and health outcomes in general. A sharp regression discon-
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tinuity design is used: Yiat = f (a) + βP ost70iat + Xiat γ + iat . Here, Yiat is out-of-pocket
expenditure or health related outcome for individual i of age a in the survey tear t.
P ost70iat is a dummy that takes the value one if individual i is over age 70 in the survey
year t; Xiat are other relevant controls.

(a) What is the key assumption for identification in this RD set up? (5 points).

(b) Suggest two robustness checks for this research design. (5 points).

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