3. Wooldridge Problem 2.6 Using data from 1988 for houses sold in Andover, Massa

Question

3. Wooldridge Problem 2.6
Using data from 1988 for houses sold in Andover, Massachusetts, from Kiel and McClain
(1995), the following equation relates housing price (price) to the distance from a recently
built garbage incinerator (dist):
fitted log(price) = 9.40 + 0.312 log(dist)
n = 135, R-squared = 0.162
(i) Interpret the coefficient on log(dist). Is the sign of this estimate what you expect
it to be?
(ii) Do you think simple regression provides an unbiased estimator of the ceteris
paribus elasticity of price with respect to dist? (Think about the city

Explanation / Answer

(i) Yes. If living closer to an incinerator depresses housing prices, then being farther away increases housing prices. (ii) If the city chose to locate the incinerator in an area away from more expensive neighborhoods, then log(dist) is positively correlated with housing quality. This would violate SLR.3, and OLS estimation is biased. (iii) Size of the house, number of bathrooms, size of the lot, age of the home, and quality of the neighborhood (including school quality), are just a handful of factors. As mentioned in part (ii), these could certainly be correlated with dist [and log(dist)].

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