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QM II

Lecture 9:
Exploration of Multiple
Regression Assumptions.

1
Organization of Lecture 9
 Review of Gauss-Markov Assumptions
 Assumptions to calculate βhat
- Multicollinearity
 Assumptions to show βhat is unbiased
- Omitted Variable Bias
- Irrelevant Variables
 Assumptions to calculate variance of βhat
- Limited Degrees of Freedom
- Non-Constant Variance
2
1. 6 Classical Linear Model Assumptions
(Wooldridge, p. 167)
 Linear in Parameters y   0  1 x1   2 x2  ... k xk  u
 Random Sampling of n
observations ( xi1, xi 2, xi 2, ..., xik , , yi ) : i  1, 2,...n
None of the independent variables are
 No perfect collinearity constant and there are no exact linear
relationship among independent
variables
 Zero conditional mean. The
error u has an expected value
of 0, given any values of the
independent variables E (u x1 , x2 ,...xk )  0
 Homoskedasticity. The error
has the same variance given
any value of the explanatory Var (u x1 , x2 ,...xk )   2
variables.

6. Normality. The population error

u is independent of the
explanatory variables and is y | x : N (  0  1 x1   2 x2  ... k xk ,  2 )
3
normally distributed
Categories of Assumptions
• Total number of assumptions necessary
depends upon how you count
– Matrix vs. Scalar
• Four categories of assumptions:
– Assumptions to calculate βhat
– Assumptions to show βhat is unbiased
– Assumptions to calculate variance of βhat
– Assumption for Hypotheses Testing (Normality
of the Errors)

4
Categories of Assumptions
• Note that these sets of assumptions follow in
sequence
• Each step builds on the previous results
• Thus if an assumption is necessary to calculate
βhat , it is also necessary to show that βhat is
unbiased, etc.
• If an assumption is only necessary for a later
step, earlier results are unaffected

5
2. Assumptions to calculate βhat

6
Assumptions to Calculate βhat :
GM3: x’s vary

• Every x takes on at least two distinct values

• Recall our bivariate estimator

ˆ1 
 ( x  x )( y  y )
i i

 (x  x )
i
2

• If x does not vary, then the denominator is 0

7
Assumptions to Calculate βhat :
GM3: x’s vary

• If x does not vary then our data points

become a vertical line.
• The slope of a vertical line is undefined
• Conceptually, if we do not observe
variation in x, we cannot draw conclusions
about how y varies with x

8
Assumptions to Calculate βhat :
GM3 New: x’s are Not Perfectly Collinear
• Matrix (X’X)-1 exists
• Recall our multivariate estimator

ˆ
  (X'X) X ' y
1

• This means that (X’X) must be of full rank

• No columns can be linearly related

9
Assumptions to Calculate βhat :
GM3 New: x’s are Not Perfectly Collinear
• If one x is a perfect linear function of another
then OLS cannot distinguish among their
effects
• If an x has no variation independent of other
x’s, OLS has no information to estimate its
effect.
• This is more general statement of the
previous assumption – x varies.

10
Multicollinearity

11
Multicollinearity
• What happens if two of variables are not perfectly
related, but are still highly correlated?

• Wooldridge, p. 866: “A term that refers to correlation among the
independent variables in a multiple regression model; it is usually
invoked when some correlations are ‘large,’ but an actual magnitude is
not well-defined.”
• KKV, p. 122. “Any situation where we can perfectly predict one
explanatory variable from one or more of the remaining explanatory
variables.”
• UCLA On-line Regression Course: “The primary concern is that as the
degree of multicollinearity increases, the regression model estimates of
the coefficients become unstable and the standard errors for the
coefficients can get wildly inflated.”
• Wooldrige, p. 144. Large standard errors can result from
12
multicollinearity.
Multicollinearity: Definition
• If multicollinearity is not perfect, then (X’X)-1 exists
and analysis can proceed.
• But multicollinearity can cause problems for
hypothesis testing even if correlations are not
perfect.
• As the level of multicollinearity increases, the
amount of independent information about the x’s
decreases
• The problem is insufficient information in the
sample
13
Multicollinearity: Implications
• Our only assumption in deriving βhat and
showing it is BLUE was that (X’X)–1 exists.

• Thus if multicollinearity is not perfect, then

OLS is unbiased and is still BLUE.

• But while βhat will have the least variance

among unbiased linear estimators, its
variance will increase.
14
Multicollinearity: Implications
• Recall our MR equation for βhat in scalar
notation:

ˆk 
 (xik  xˆik ) yi
 (x ik  xik )
ˆ 2

• As multicollinearity increases, the

correlation between xik and xikhat increases
15
Multicollinearity: Implications
• Reducing x’s variation from xhat is the same as
reducing x’s variation from the mean of x in the
bivariate model. The closer x is to its
predicted value, the smaller
the quantity and therefore
• Recall the equation for the variance of βhat2the
in larger
the bivariate regression
 uˆ the variance
model: ˆ
Var ( 1 )   ˆ 
2
around 2Beta1_hat. (a.k.a a
1

( xi  x ) standard error).
larger

• Now, we have the analogous formula for Multiple Regression

 2
 2
Var ( ˆ1 )   2ˆ  uˆ
 uˆ
1
 i1 i1
( x  ˆ
x ) 2
SST1 (1  R 2
1)

, where SST1 is the total variation in x1 and R12 is the R-squared from
the regression of x1 on all the other x's. 16
Multicollinearity: Implications
• Thus as the correlation between x and xhat
increases, the denominator for the
variance of βhat decreases – increasing the
variance of βhat

• Notice if x1 is uncorrelated with x2…xn,

then the formula is the same as in the
bivariate case.

17
Multicollinearity: Implications
• In practice, x’s that are causing the same
y are often correlated to some extent

• If the correlation is high, it becomes

difficult to distinguish the impact of x1 on y
from the impact of x2…xn

• OLS estimates tend to be sensitive to

small changes in the data. 18
Illustrating Multicollinearity
• When correlation
among x’s is low, OLS
has lots of information
X1
to estimate βhat
Y

• This gives us X2

confidence in our
estimates of βhat
19
Illustrating Multicollinearity
• When correlation
among x’s is high,
OLS has very little x1
information to
estimate βhat
y x2
• This makes us
relatively uncertain
βhat
20
Multicollinearity: Causes
• x’s are causally related to one another and you put
them both in your model. Proximate versus ultimate
causality.
(i.e. legacy v. political institutions and economic reform)

• Poorly constructed sampling design causes

correlation among x’s.
(i.e. You survey 50 districts in Indonesia, where the richest districts are
all ethnically homogenous, so you cannot distinguish between
ethnic tension and wealth on propensity to violence.).

• Poorly constructed measures over aggregate

information can make cases correlate.
(i.e. Freedom House – Political Liberties, Global Competitiveness
Index) 21
Multicollinearity: Causes
polynomial terms or trend indicators.
(i.e. Time since the last independent election correlates with Eastern
Europe or Former Soviet Union).

• Too many variables in the model – x’s

measure the same conceptual variable.
(i.e. Two causal variables essentially pick-up up on the same
underlying variable).

22
Multicollinearity: Warning Signs
• F-test of joint-significance of several variables is
significant but coefficients are not.

• Coefficients are substantively large but

statistically insignificant.

• Standard errors of βhat ’s change when other

variables included or removed, but estimated
value of βhat does not.

23
Multicollinearity: Warning Signs
• Multicollinearity could be a problem any time that
a coefficient is not statistically significant

levels

• If coefficients are significant, then multicollinearity

is not a problem for hypothesis testing.

• Its only effect is to increase the σβhat2

24
Multicollinearity: The Diagnostic
• Diagnostic of multicollinearity is the
auxiliary R-squared

model

• R-squared will show you linear correlation

between each x and all other x’s in the
model
25
Multicollinearity: The Diagnostic
• There is no definitive threshold when the
auxiliary R-squared is too high.
– Depends on whether β is significant

• If auxiliary R-squared is close to 1 and βhat is

insignificant, you should be concerned

– If n is small then .7 or .8 may be too high

26
Multicollinearity: Remedies

variation in x’s

• Change unit of analysis to allow more cases and

more variation in x’s (districts instead of states)

• Look at bivariate correlations prior to modeling

27
Multicollinearity: Remedies
• Disaggregate measures to capture
independent variation

• Create a composite scale or index if

variables measure the same concept

• Construct measures to avoid

correlations
28
Multicollinearity: An Example
reg approval cpi unemrate realgnp
Source | SS df MS Number of obs = 148
---------+------------------------------ F( 3, 144) = 5.38
Model | 2764.51489 3 921.504964 Prob > F = 0.0015
Residual | 24686.582 144 171.434597 R-squared = 0.1007
Total | 27451.0969 147 186.742156 Root MSE = 13.093
------------------------------------------------------------------------------
approval | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
cpi | -.0519523 .1189559 -0.437 0.663 -.2870775 .1831729
unemrate | 1.38775 .9029763 1.537 0.127 -.3970503 3.172551
realgnp | -.0120317 .007462 -1.612 0.109 -.0267809 .0027176
_cons | 61.52899 5.326701 11.551 0.000 51.00037 72.05762
------------------------------------------------------------------------------

29
Multicollinearity: An Example
reg cpi unemrate realgnp

Source | SS df MS Number of obs = 148

---------+------------------------------ F( 2, 145) = 493.51
Model | 82467.9449 2 41233.9725 Prob > F = 0.0000
Residual | 12115.0951 145 83.5523803 R-squared = 0.8719
Total | 94583.0401 147 643.422041 Root MSE = 9.1407

------------------------------------------------------------------------------
cpi | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
unemrate | 3.953796 .5381228 7.347 0.000 2.890218 5.017374
realgnp | .0538443 .0026727 20.146 0.000 .0485618 .0591267
_cons | -30.68007 2.708701 -11.326 0.000 -36.03371 -25.32644
------------------------------------------------------------------------------

30
Multicollinearity: An Example
alpha realgnp unemrate cpi, item gen(economy) std

item-test item-rest interitem

Item | Obs Sign correlation correlation correlation alpha
---------+--------------------------------------------------------------------
realgnp | 148 + 0.9179 0.8117 0.7165 0.8348
unemrate | 148 + 0.8478 0.6720 0.9079 0.9517
cpi | 148 + 0.9621 0.9092 0.5961 0.7469
---------+--------------------------------------------------------------------
Test 0.7402 0.8952
---------+--------------------------------------------------------------------

31
Multicollinearity: An Example
. reg approval economy

Source | SS df MS Number of obs = 148

---------+------------------------------ F( 1, 146) = 7.89
Model | 1408.13844 1 1408.13844 Prob > F = 0.0056
Residual | 26042.9585 146 178.376428 R-squared = 0.0513
Total | 27451.0969 147 186.742156 Root MSE = 13.356

------------------------------------------------------------------------------
approval | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
economy | -3.403865 1.211486 -2.810 0.006 -5.798181 -1.00955
_cons | 54.68946 1.097837 49.816 0.000 52.51975 56.85916
------------------------------------------------------------------------------

32
3. Assumptions to Show βhat is Unbiased

33
Assumptions to Show βhat is Unbiased –
GM4: x’s are fixed
• Conceptually, this assumption implies that
we could repeat an “experiment” in which
we held x constant and observed new
values for u, and y
• This assumption is necessary to allow us
to calculate a distribution of βhat
• Knowing the distribution of βhat is essential
for calculating its mean.

34
Assumptions to Show βhat is Unbiased –

GM4: x’s are fixed

• Without knowing the mean of βhat, we
cannot know whether E(βhat )= β
• In addition, without knowing the mean of
βhat or its distribution, we cannot know the
variance of βhat
• In practical terms, we must assume that
the independent variables are measured
without error.

35
Assumptions to Show βhat is Unbiased –
GM4: x’s are fixed
• Recall our equation for βhat :
ˆ  (X'X)1 X ' y  (X'X)1 X '( X  u )
ˆ  (X'X)1 X ' X  (X'X)1 X ' u
ˆ
    (X'X) X ' u
1

• X is fixed and non-zero

• Thus if
E (u )  0, then  E ( ˆ )  
36
Assumptions to Show βhat is Unbiased –

GM4: x’s are fixed

• Conceptually, this assumption means that
we believe that our theory - described in
the equation (y=Xβ+u) accurately
represents our dependent variable.
• If E(u) is not equal to zero then we have
the wrong equation – an omitted variable

37
Assumptions to Show βhat is
Unbiased – x’s are fixed
• Note that the assumption E(u)=0 implies
that E(u1)=E(u2)…E(un)=0
• Therefore, the assumption E(u)=0 also
implies that u is independent of the values
of X
• That is, E(ui|xik)=0

38
Omitted Variable Bias

39
What is Model Specification?
• Model Specification is two sets of choices:
– The set of variables that we include in a
model
– The functional form of the relationships we
specify

• These are central theoretical choices

question
40
What is the “Right” Model?
• In truth, all our models are misspecified to
some extent.

• Our theories are always a simplification of

reality, and all our measures are imperfect.

• Our task is to seek models that are

reasonably well specified – keeps our
errors relatively modest
41
Model Specification: Causes
• There are four basic types of model
misspecification:
– Inclusion of an irrelevant variable
– Exclusion of a relevant variable

– Measurement error
– Erroneous functional form for the relationship

42
Omitted Variable Bias:
Excluding Relevant Variables
• Imagine that the true causes of y can be
represented as:

y   0  1 x1   2 x2  u

• But we estimate the model:

y   0  1 x1  u *

Where :
u   2 x2  u
*
43
Omitted Variable Bias:
Consequences
• Clearly this model violates our assumption that
E(u)=0
– E(β2 x2+u) is not 0

• We required this assumption in order to show

that βhat is an unbiased estimator of β

• Thus by excluding x2, we risk biasing our

coefficients for x1

• If βhat is biased, then σβhat is also biased

44
Omitted Variable Bias:
Consequences
• Under these circumstances, what does
our estimate of βhat reflect?
• Recall that:

ˆ1  ( X 1 ' X 1 ) 1 X 1 ' y

ˆ
1  ( X 1 ' X 1 ) X 1 '( X 11  X 2  2  u )
1

ˆ
1  1  ( X 1 ' X 1 ) X 1 ' X 2  2  ( X 1 ' X 1 ) X 1 ' u
1 1

45
Omitted Variable Bias:
Consequences
• We retain the assumption that E(u)=0
• That is the expectation of the errors is 0
after we account for the impact of x2
• Thus our estimate of βhat1 is:

ˆ
1  1  ( X 1 ' X 1 ) X 1 ' X 2  2
1

46
Omitted Variable Bias:
Consequences
• This equation indicates that our estimate
of βhat 1 will be biased by two factors
• The extent of the correlation between x1
and x2
• The extent of x2’s impact on y
• Often difficult to know direction of bias

47
Omitted Variable Bias:
Consequences
• Remember, if either of these sources of
bias is 0, then the overall bias is 0
• Thus E(βhat1)= β1 if:
– Correlation of x1 & x2=0; note this is a
characteristic of the sample
OR
– β2=0; note this is not a statement about the
sample, but a theoretical assertion

48
Summary of Bias in β1hat the Estimator
when x2 is omitted

β2>0 Positive Bias: β1hat Negative Bias: β1hat will

will appear to have a appear to have a strong
strong positive negative
relationship with y. relationship with y.
(Also called upward bias (Also called downward bias
or biased to the right) or biased to the left)

β2<0 Negative Bias Positive Bias

49
Omitting Variables and Model
Specification
• These criteria give us our conceptual
standards for determining when a variable
must be included
• A variable must be included in a
regression equation IF:
– The variable is correlated with other x’s
AND
– The variable is also a cause of y

50
Illustrating Omitted Variable Bias
• Imagine a true model
where x1 has a small
effect on y and is
correlated with x2 that x1
has a large effect on y.
y
• Specifying both variables x2
can distinguish these
effects

51
Illustrating Omitted Variable
Bias
• But when we run
simple model
excluding x2, we
attribute all causal X1
influence to x1
Y
• Coefficient is too big
and variance of
coefficient is too small

52
Omitted Variable Bias: Causes
• This problem is primarily theoretical rather than
“statistical”

• Though OVTEST or LINKTEST in STATA are

designed to offer some indication, ultimately
they not satisfying. They may reveal that are
residuals are not correlated with the
independent variables, but this may still not be
theoretically satisfying.

• Scholars can form hypotheses about other x’s

that may be a source of omitted variable bias53
The Classis Case of Omitted
Variable Bias

% of Patients
taking medicine

# of Patient Deaths

% of Patients Ill

54
Spuriousness and Omitted
Variable Bias: An IR Example

International
Institutions
Cooperative
Behavior

National Interests

55
Including Irrelevant Variables
• Do we see the same kinds of problems if
we include irrelevant variables?
• NO!
• Imagine we estimate the equation:

yˆ  ˆ0  ˆ1 x1  ˆ2 x2  uˆ

56
Including Irrelevant Variables
• In this case:  ˆ0 
 
E ( ˆ )     ˆ1 
 ˆ 
  2 
• If βhat2=0, our estimate of βhat1 is not
affected
• If x1’x2=0, our estimate of βhat1 is not
affected
• But including x2 if it is not relevant does
unnecessarily inflate the σ 2 βhat1 57
Including Irrelevant Variables:
Consequences
• σ 2 βhat1 increases for two reasons:
• Addition of parameter for x2 reduces the
degrees of freedom
– Part of estimator for σuhat2
• If βhat2=0 but x1’x2 is not, then including x2
unnecessarily reduces independent
variation of x1. (Multicollinearity)
• Thus parsimony remains a virtue
58
Rules for Model Specification
• Model specification is fundamentally a
theoretical exercise. We build models to
reflect our theories
• As much as we would like, the theorizing
process cannot be replaced with statistical
tests
• Avoid mechanistic rules for
specification such as stepwise
regression
59
The Evils of Stepwise
Regression
• Stepwise regression is a method of model
specification that chooses variables on:
– Significance of their t-scores
– Their contribution to R2

• Variables will be selected in or out

depending on the order they are
introduced into the model
60
The Evils of Stepwise
Regression
• Stepwise regression can fall victim to
specification errors as a result of
multicollinearity or spuriousness problems

model

• Thus stepwise regression is a

theoretical curve-fitting

• Our forecasting ability becomes limited 61

• Variable selection should be based on
causal process underlying the dependent
variable

• This is a theoretical rather than a

statistical exercise

• There are rules of thumb for including or

excluding variables from an analysis, but
ultimately Mr. Theory needs to be your 62
guide.
Reasons to Include a Variable
• x2 is a potential Source of Omitted
Variable Bias
– Variable is a cause of y and correlated with x1
• Methodological Control variables
– Selection parameters, temporal dependence, etc
• You must include these x’s as controls
• x2 is a benchmark for evaluating the
substantive impact of x1
63
Reasons to Exclude a Variable
• x2 is NOT a cause of y, but it creates
multicollinearity problems
• x2 is an intervening variable in between x1
and y (a proximate cause of y, while x1
remains the ultimate cause).
• With intervening variables, a good strategy
is to run the model both with and without
x2
– Examine change in coefficient for x1
64
3. Assumptions to Calculate the
Variance of βhat

65
Calculating the Variance of βhat
-Degrees of Freedom
• We must have more cases than we have
x’s
• In other words, n>k
• Recall that our estimator of βhat is the
result of numerous summation operations
• Each summation has n pieces of
information about x in it, but…

66
Calculating the Variance of βhat :
Degrees of Freedom
• Not all n pieces of information about x in the
summations are independent
• Take the calculation:
n

 (x
i 1
i  x)

• Once we calculate x-bar, then for the final

observation xn, we know what that observation
of x must be, given x-bar
67
Calculating the Variance of βhat:
Degrees of Freedom

• Thus the degrees of freedom for the summation

is n-1-1(for the intercept)
n

 (x
i 1
i  x)

• We lose one additional piece of information in

estimating the parameter x-bar.
• For each parameter, we lose one more piece of
independent information because the
parameters depend on the values in the data.

68
Calculating the Variance of βhat:
Degrees of Freedom
• Dividing by the degrees of freedom was necessary to
make an unbiased estimate of the variance of βhat
• Recall the formulas: 2 
 i  SSR /(n  k  1)
ˆ
u 2

(n  k  1)
Scalar Notation Matrix Notation
ˆ  uˆ
2
Var ( 1 )   
2
ˆ 1
 i
( x  x ) 2 ˆ
Var ( )   ˆ   uˆ ( X ' X )
2 2 1

• If k>n then the variance of βhat is undefined

69
Calculating the Variance of βhat:
Sufficient Degrees of Freedom
• Conceptually, this means that the values
of the βhat vector are over-determined
• Hypothesis tests become impossible
• One could calculate a βhat “by hand,”
though it would be useless.
• Homework 2 - Problem 6.

70
Calculating the Variance of βhat:
GM5: Error Variance is Constant
• More specifically we assume that:

E (ui  u )  E (ui )  
2 2 2
u

• To calculate the variance of βhat we factored

σu2 out of a summation across the n data
points.

• If σu2 is not constant then our numerator for

σβ-hat2 will be wrong
71
Calculating the Variance of β:
Error Variance is Constant
• Conceptually, this assumption states that
each of our observations is equally reliable
as a piece of information for estimating β
• If E(u) is not equal to σu2 then some data
• This is known as heteroskedasticity

72
Calculating the Variance of βhat:
The Independence of Errors
• More specifically, we assume that:

E[(ut − u )(u s − u )] = cov(ut , u s ) = 0

• Where t and s are errors on particular variables
and the mean of u is the overall model error
• Proof of minimum variance assumed that matrix
uu’ can be factored out of the variance of βhat as
σu2I.
• All elements of uu’ matrix off the diagonal are
assumed to be 0 73
Calculating the Variance of βhat
The Independence of Errors

• If this is not true, then OLS is not BLUE and

our equation for the variance of βhat is wrong
– usually too small
• Conceptually, this assumption means that
the only systematic factors predicting y are
the variables in the X matrix, u is not
systematic

74
Examples to Work Through

75
WARNING !!!
• ALL DATA IN THE FOLLOWING
EXAMPLES ARE COMPLETELY
ARTIFICIAL!

SUBSTANTIVE CONCLUSIONS FROM
THESE RESULTS!!!

76
a Cause of Democracy

r =0.6 Democracy

Economic Wealth β =0.4

77
Regressing Democracy on

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 1, 98) = 34.98
Model | 3446.51643 1 3446.51643 Prob > F = 0.0000
Residual | 9656.70632 98 98.5378196 R-squared = 0.2630
Total | 13103.2227 99 132.355785 Root MSE = 9.9266
------------------------------------------------------------------------------
democ | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
tottrade | 1.010671 .1708917 5.914 0.000 .6715418 1.3498
_cons | 2.372788 2.009129 1.181 0.240 -1.614264 6.35984
------------------------------------------------------------------------------

78
Regressing Democracy on

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 2, 97) = 28.27
Model | 4825.11958 2 2412.55979 Prob > F = 0.0000
Residual | 8278.10316 97 85.3412697 R-squared = 0.3682
Total | 13103.2227 99 132.355785 Root MSE = 9.238

------------------------------------------------------------------------------
democ | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
tottrade | .5284415 .1992195 2.653 0.009 .1330461 .923837
wealth | .3886304 .0966934 4.019 0.000 .1967208 .5805399
_cons | 1.199239 1.892422 0.634 0.528 -2.556694 4.955173
------------------------------------------------------------------------------
79
Irrelevant Controls and
Multicollinearity

β =0.5

r =0.6 r = .75 Democracy

β =0.4
Economic Wealth
β=0
r = .95
Military Power

80
Regressing Democracy on
. reg democ tottrade wealth milpow

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 3, 96) = 18.70
Model | 4833.01576 3 1611.00525 Prob > F = 0.0000
Residual | 8270.20698 96 86.1479894 R-squared = 0.3688
Total | 13103.2227 99 132.355785 Root MSE = 9.2816
------------------------------------------------------------------------------
democ | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
tottrade | .6306823 .3925667 1.607 0.111 -.1485564 1.409921
wealth | .5127502 .4213262 1.217 0.227 -.3235757 1.349076
milpow | -.0619981 .2047824 -0.303 0.763 -.468488 .3444917
_cons | 1.088159 1.936422 0.562 0.575 -2.755609 4.931927
------------------------------------------------------------------------------

81
Auxiliary Regression on Wealth,

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 2, 97) = 1382.91
Model | 13837.6049 2 6918.80243 Prob > F = 0.0000
Residual | 485.297631 97 5.00306836 R-squared = 0.9661
Total | 14322.9025 99 144.675783 Root MSE = 2.2368
------------------------------------------------------------------------------
wealth | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
tottrade | -.7139595 .0607854 -11.746 0.000 -.8346018 -.5933173
milpow | .4729452 .0113791 41.562 0.000 .4503608 .4955297
_cons | 1.007912 .4552951 2.214 0.029 .1042778 1.911547
------------------------------------------------------------------------------

82
Irrelevant Controls and
Extraneous (but harmless) B’s

β =0.5

r =0.6 r = .03 Democracy

β =0.4
Economic Wealth
β=0
r = .10
Olympic Medals

83
Regressing Democracy on

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 3, 96) = 19.03
Model | 4886.75371 3 1628.9179 Prob > F = 0.0000
Residual | 8216.46904 96 85.5882191 R-squared = 0.3729
Total | 13103.2227 99 132.355785 Root MSE = 9.2514
------------------------------------------------------------------------------
democ | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
tottrade | .5201341 .1997475 2.604 0.011 .1236385 .9166298
wealth | .3988365 .0975772 4.087 0.000 .2051473 .5925257
medals | -.1334243 .1572285 -0.849 0.398 -.4455204 .1786718
_cons | 2.471675 2.416604 1.023 0.309 -2.325246 7.268597
------------------------------------------------------------------------------

84
Control Variables for
Comparisons

r =0.05 Presidential Approval

International B=0.5
Threats

85
Regressing Approval on GNP
Growth, Omitting Threats
reg approve gnpgro

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 1, 98) = 13.70
Model | 4419.43882 1 4419.43882 Prob > F = 0.0004
Residual | 31604.8543 98 322.498513 R-squared = 0.1227
Total | 36024.2931 99 363.881748 Root MSE = 17.958

------------------------------------------------------------------------------
approve | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
gnpgro | 1.144467 .3091601 3.702 0.000 .5309485 1.757985
_cons | 27.2151 3.634715 7.488 0.000 20.00213 34.42807
------------------------------------------------------------------------------

86
Regressing Approval on GNP
Growth AND Threats
reg approve gnpgro threat

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 2, 97) = 162.55
Model | 27745.7297 2 13872.8648 Prob > F = 0.0000
Residual | 8278.56343 97 85.3460147 R-squared = 0.7702
Total | 36024.2931 99 363.881748 Root MSE = 9.2383
------------------------------------------------------------------------------
approve | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
gnpgro | 1.015053 .1592343 6.375 0.000 .6990165 1.331089
threat | .4972377 .0300769 16.532 0.000 .4375434 .556932
_cons | 4.292249 2.327818 1.844 0.068 -.3278251 8.912323
------------------------------------------------------------------------------

87
Controlling for Intervening
Variables
Similarity of
Regime Type β=0

β = 1.5 Bilateral Trade Flows

Similarity of β=2.0
Security Interests

88
Directly on Regime Similarity

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 1, 98) = 46.42
Model | 21021.1745 1 21021.1745 Prob > F = 0.0000
Residual | 44375.3387 98 452.809579 R-squared = 0.3214
Total | 65396.5132 99 660.570841 Root MSE = 21.279
------------------------------------------------------------------------------
tradeflo | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+--------------------------------------------------------------------
regimsim | 2.49602 .3663341 6.814 0.000 1.769042 3.222998
_cons | 10.20431 4.306895 2.369 0.020 1.657422 18.75121
------------------------------------------------------------------------------

89
Regime & Security Similarity

Source | SS df MS Number of obs = 100

---------+------------------------------ F( 2, 97) = 334.65
Model | 57118.4095 2 28559.2047 Prob > F = 0.0000
Residual | 8278.10377 97 85.341276 R-squared = 0.8734