4) Consider the following model for how state employment depends on the tax reve

Question

4) Consider the following model for how state employment depends on the tax revenue mix: log(employment)-A, + ,share-property + -share-income + ßys hare-sales + u where share_pop is the share of property taxes in total tax revenue; share income is the share of income taxes, and share_sales is the share of sales taxes. The share of tax revenue from all other sources (share other) is omitted. The shares have all been multiplied by 100 so that a value of 50 for share property would indicate that 50% of total tax revenue comes from property taxes, for example. (15 points: 5/5/5) (i) Explain why share_other is omitted. (ii) Provide a careful interpretation off, (ii)Suppose share_income and share sales are highly correlated. How would you expect this correlation to affect the bias and variance of the OLS estimator for ? In principle, how could you mitigate any potential concerns about the effect of this correlation on the bias and variance?

Explanation / Answer

1) The share_other is omitted because it may be correlated with other independent variables.

2) The coefficient C tells that if the share_income increases by one unit employment on average will increase by (100*2) percent with others held constant.

3) If share_income and share_sales are highly correlated then OLS estimators will still be unbiased but not efficient. The variance of 2 will be large thus it will lead to wider confidence interval and insignificant t-ratios. Since multicollinearity is a sample phenomenon so we can try with other sample or can drop one of the correlated variable.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.