momeduc = motheduc * Regress the outcome variable, lwage , on all the RHS variab
ID: 3154026 • Letter: M
Question
momeduc = motheduc*
Regress the outcome variable, lwage, on all the RHS variables in equation:
I) Interpret the coefficient for 'coleduc'?
II) The data set contains the variable, nearcol, which is equal to 1 for people whose home is close to a college (i.e., community college or state university) and equal to 0 otherwise. Do you think nearcol is uncorrelated with u in equation (1)?
III) Assuming that nearcol and u are uncorrelated, what other assumptions must nearcol satisfy in order to be a valid Instrumen Variable for coleduc?
lwage = 0 + Acoleduc + 2mom educ + 3exper + AIQ + u (1) where lwage is log of hourly wage, coleduc is a dummy variable indicating college attendance, which is our treatment variable, momeduc is mother's education level, exper is years of experience, and IQ is IQ score.Explanation / Answer
The Coefficient of 'coleduc' is 0.1864204, which indicates that if we keep the motheduc, exper and IQ fixed at certain level then for unit increase/decrease in the value of 'coleduc' the value of the lwage will be increased/decreased by 0.1864204.
The values of the nearcol variable are not given, sample error = observed lwage - estimated or predicted lwage
Calculate the sample correlation coeffcient of sample error with the nearcol variable and test for correlation equal to zero
If we assume that nearcol and u are uncorrelated, then nearcol must be correlated with the the coleduc to be an instrumental variable for coleduc.
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