14.

387 Spring 2014

Problem Set 2 Solutions
1.
(a) Fits and residuals:
x
i
= z

i
= x
i
x
i
cov
_
x
i
,

i
_
= 0
Plug these in to the IV estimand:

IV
=
cov (y
i
, x
i
)
cov (x
i
, x
i
)
=
cov (y
i
, x
i
)
cov
_
x
i
+

i
, x
i
_
=
cov (y
i
, x
i
)
cov ( x
i
, x
i
) +cov
_

, x
i
_
=
cov (y
i
, x
i
)
var ( x
i
)
=
2SLS
(b) Fits:
x
i
= z

i

x

i
= z

Preliminaries:

p

1
N
Z

Z
p
Q
Z

Z
1
N
Z

p
0
1

N
Z

d
N (0,
Z

)
Using these we get:

IV
=
_

X

X
_
1

Xy
= (

X)
1

y
= (

(Z +))
1

(X +)
= + (

Z +

)
1

N
_

IV

_
=

N (

Z +

)
1

=
_

1
N
Z

Z +

1
N
Z

_
1

N
Z

d
(

Q
Z

Z
)
1

N (0,
Z

)
= N
_
0, (

Q
Z

Z
)
1

Q
Z

Z
)
1
_

IV
=
_
X

X
_
1
X

y
= (

X)
1

y
= (

(Z +))
1

(X +)
= + (

Z +

)
1

N
_

IV

_
=

N (

Z +

)
1

=
_

1
N
Z

Z +

1
N
Z

_
1

N
Z

d
(

Q
Z

Z
)
1

N (0,
Z

)
= N
_
0, (

Q
Z

Z
)
1

Q
Z

Z
)
1
_
Thus, the limiting distributions of

IV
and

IV
are the same. We know that

IV
and

2SLS
are the same, and
thus also the limiting distributions of

IV
and

2SLS
are the same.
(c) Reduced form:
y
i
= z

i
+
i

i
=
i
+
i
Preliminaries:
1
N
Z

Z
p
Q
Z

Z
1

N
Z

d
N (0,
Z

)
1

N
Z

d
N (0,
Z

)
Using these we get:

2SLS
=
_
X

_
1
X

y
= (

Z)
1

y
= (

Z)
1

(Z +)
= + (

Z)
1

N
_

2SLS

_
=

N (

Z)
1

=
_

1
N
Z

Z
_
1

N
Z

d
(

Q
Z

Z
)
1

N (0,
Z

)
= N
_
(

Q
Z

Z
)
1

Q
Z

Z
)
1
_
Notice that

= E
_
( +) ( +)

= E
_

+ 2

=
2
E [

] +E [

] + 2E [

]
=

+
2

+ 2

and

= E
_
1
N
Z

Z
_
= E
_
1
N
Z

+
2

+ 2

_
Z
_
= E
_
1
N
Z

Z
_
+
2
E
_
1
N
Z

Z
_
+ 2E
_
1
N
Z

Z
_
=
Z

+
2

+ 2
Z

.
Thus, the limiting distributions of

2SLS
and

2SLS
are dierent unless

which is equivalent to
2

+
2

= 0.
Both of these estimators are consistent, but only

2SLS
is unbiased in nite sample (assuming Q > 1).The
relationship between the asymptotic (as well as nite sample) variances of the estimators is ambiguous. For in-
stace, if we assume homoscedasticity, the sign of the dierence between the asymptotic variances of

2SLS
and

2SLS
depends on the sign of
2

+ 2

which can be either postitive or negative.

2.
(a) Model:
D
i
= D
0i
+ (D
1i
D
0i
) Z
i
Y
1i
= Y
0i
+
Y
i
= Y
0i
+ (Y
1i
Y
0i
) D
i
= Y
0i
+D
i
3
Wald estimand:
E [Y
i
| Z
i
= 1] E [Y
i
| Z
i
= 0]
E [D
i
| Z
i
= 1] E [D
i
| Z
i
= 0]
=
E [Y
0i
+D
i
| Z
i
= 1] E [Y
0i
+D
i
| Z
i
= 0]
E [D
0i
+ (D
1i
D
0i
) Z
i
| Z
i
= 1] E [D
0i
+ (D
1i
D
0i
) Z
i
| Z
i
= 0]
=
E [D
1i
] E [D
0i
]
E [D
1i
D
0i
]
=
E [D
1i
D
0i
]
E [D
1i
D
0i
]
=
Notice that monotonicity played no role above.
Bias formula in the general case:
E [Y
i
| Z
i
= 1] E [Y
i
| Z
i
= 0]
E [D
i
| Z
i
= 1] E [D
i
| Z
i
= 0]
=
E [Y
0i
+ (Y
1i
Y
0i
) D
i
| Z
i
= 1] E [Y
0i
+ (Y
1i
Y
0i
) D
i
| Z
i
= 0]
E [D
0i
+ (D
1i
D
0i
) Z
i
| Z
i
= 1] E [D
0i
+ (D
1i
D
0i
) Z
i
| Z
i
= 0]
=
E [(Y
1i
Y
0i
) (D
1i
D
0i
)]
E [D
1i
D
0i
]
= E [Y
1i
Y
0i
| D
1i
> D
0i
]
P [D
1i
> D
0i
]
P [D
1i
> D
0i
] P [D
1i
< D
0i
]
E [Y
1i
Y
0i
| D
1i
< D
0i
]
P [D
1i
< D
0i
]
P [D
1i
> D
0i
] P [D
1i
< D
0i
]
= E [Y
1i
Y
0i
| D
1i
> D
0i
]
+
P [D
1i
< D
0i
]
P [D
1i
> D
0i
] P [D
1i
< D
0i
]
{E [Y
1i
Y
0i
| D
1i
> D
0i
] E [Y
1i
Y
0i
| D
1i
< D
0i
]}
WALD LATE =
P [D
1i
< D
0i
]
P [D
1i
> D
0i
] P [D
1i
< D
0i
]
= {E [Y
1i
Y
0i
| D
1i
> D
0i
] E [Y
1i
Y
0i
| D
1i
< D
0i
]}
Thus, the failure of monotonicity is not a huge concern if either E [Y
1i
Y
0i
| D
1i
> D
0i
] E [Y
1i
Y
0i
| D
1i
< D
0i
]
or P [D
1i
> D
0i
] is large relative to P [D
1i
< D
0i
].
(b) Notice that in general
E [Y
i
| Z
i
= 1] E [Y
i
| Z
i
= 0] = E [Y
1i
Y
0i
| D
1i
> D
0i
] P [D
1i
> D
0i
]
E [Y
1i
Y
0i
| D
1i
< D
0i
] P [D
1i
< D
0i
] .
Suppose Y
1i
Y
0i
> 0 for all i. Then,
E [Y
i
| Z
i
= 1] E [Y
i
| Z
i
= 0] 0

E [Y
1i
Y
0i
| D
1i
> D
0i
]
E [Y
1i
Y
0i
| D
1i
< D
0i
]

P [D
1i
< D
0i
]
P [D
1i
> D
0i
]
.
4
(c) No always-takers: D
0i
= 0 for all i which implies that D
i
= 1 D
1i
= 1, Z
i
= 1. Thus,
E [Y
1i
Y
0i
| D
1i
> D
0i
] = E [Y
1i
Y
0i
| D
1i
= 1]
= E [Y
1i
Y
0i
| D
1i
= 1, Z
i
= 1]
= E [Y
1i
Y
0i
| D
i
= 1] .
No never-takers: D
1i
= 1 for all i which implies that D
i
= 0 D
0i
= 1, Z
i
= 0. Thus,
E [Y
1i
Y
0i
| D
1i
> D
0i
] = E [Y
1i
Y
0i
| D
0i
= 0]
= E [Y
1i
Y
0i
| D
0i
= 1, Z
i
= 0]
= E [Y
1i
Y
0i
| D
i
= 0] .
3.
(a) Diculties in determining the causal eect of female employment on divorce:
Reverse causality (divorce causing employment)
Confounding factors
Experiment to capture the causal eect of interest:
Ideally would like to randomize the employment status of married women
More realistically need an instrument that aects employment probability (rst stage) but does not aect
divorce probability directly or through any other channel (exclusion restriction)
(b) Notation:
D
i
: divorce dummy
E
i
: employment dummy
X
i
: covariate vector
Z
i
: instrument dummy

i
,
i
: unobserved random errors
Observed divorce and employment status:
D
i
= 1 [X

0
+
1
E
i
>
i
]
E
i
= 1 [X

0
+
1
Z
i
>
i
]
Potential divorce and employment status:
D
1i
= 1 [X

0
+
1
>
i
]
D
0i
= 1 [X

0
>
i
]
E
1i
= 1 [X

0
+
1
>
i
]
E
0i
= 1 [X

0
>
i
]
(c)
5
The population for the study should be working-aged married women (panel data) or working-aged ever-
married women (cross-sectional data).
In the structural model the endogeneity of employment means that
i
and
i
are correlated.
In the causal model the endogeneity of employment means that potential outcomes E
0i
and E
1i
are not
(mean-)independent of the treatment status D
i
.
(d) Distributional assumption:
_

i

i
_
iid
N
__
0
0
_
,
_

2

__
Notation:
()= CDF of standard univariate normal distribution

b
(, )= CDF of standard bivariate normal distributions
ATE = E [D
1i
D
0i
]
= E {1 [X

0
+
1
>
i
] 1 [X

0
>
i
]}
= E
_
E
_
1
_
X

0
+
1

>

i

_
| X
i
_
E
_
1
_
X

>

i

_
| X
i
__
= E
_

_
X

0
+
1

_
X

__
ETT = E [D
1i
D
0i
| E
i
= 1]
= E {1 [X

0
+
1
>
i
] 1 [X

0
>
i
] | X

0
+
1
Z
i
>
i
}
= E
_
E
_
1
_
X

0
+
1

>

i

_
| X
i
, Z
i
,
X

0
+
1
Z
i

>

i

__
E
_
E
_
1
_
X

>

i

_
| X
i
, Z
i
,
X

0
+
1
Z
i

>

i

__
= E
_
_

b
_
X

i
0+1

,
X

i
0+1Zi

b
_
X

i
0

,
X

i
0+1Zi

_
X

i
0+1Zi

_
_
_
LATE = E [D
1i
D
0i
| E
1i
> E
0i
]
= E {1 [X

0
+
1
>
i
] 1 [X

0
>
i
] | X

0
+
1
>
i
> X

0
}
= E
_
E
_
1
_
X

0
+
1

>

i

_
| X
i
,
X

0
+
1

>

i

>
X

__
E
_
E
_
1
_
X

>

i

_
| X
i
,
X

0
+
1

>

i

>
X

__
= E
_
_
_

b
_
X

i
0+1

,
X

i
0+1

b
_
X

i
0+1

,
X

i
+0

__

b
_
X

i
0

,
X

i
0+1

b
_
X

i
0

,
X

i
+0

__

_
X

i
0+1

_
X

i
+0

_
_
_
ATE is a weighted average of ETT and the average eect on the untreated. ETT is a weighted average of
LATE and the average eect on the always-takers. In general we cannot say anything about the relative
6
magnitudes of ATE, ETT and LATE.
(e) See attached code.
4.
(a) Model:
y
it
=
i
+x

it
+
it
where i = 1, . . . , N and t = 1, 2.
Notation:
y
it
= y
it
y
i
x
it
= x
it
x
i
y
i
= y
i2
y
i1
x
i
= x
i2
x
i1
Notice that
x
i1
= x
i1

1
2
(x
i1
+x
i2
)
=
1
2
(x
i1
x
i2
)
=
1
2
x
i
x
i2
= x
it2

1
2
(x
i1
+x
i2
)
=
1
2
(x
i2
x
i1
)
=
1
2
x
i
y
i1
= y
i1

1
2
(y
i1
+y
i2
)
=
1
2
(y
i1
y
i2
)
=
1
2
y
i
y
i2
= y
it2

1
2
(y
i1
+y
i2
)
=
1
2
(y
i2
y
i1
)
=
1
2
y
i
.
7
Using this we get

FE
=
_
N

i=1
x
i1
x

i1
+ x
i2
x

i2
_
1
_
N

i=1
x
i1
y
i1
+ x
i2
y
i2
_
=
_
N

i=1
1
4
x
i
x

i
+
1
4
x
i
x

i
_
1
_
N

i=1
1
4
x
i
y
i
+
1
4
x
i
y
i
_
=
_
N

i=1
x
i
x

i
_
1
_
N

i=1
x
i
y
i
_
=

FD
.
(b) Notation:
Y
ist
: employment dummy for individual i in state s in year t
FA
s
: fraction of teenagers in the aected wage range in state s
D
t
: dummy for year 1990
Micro-level model:
Y
ist
=
s
+
t
+ (FA
s
D
t
) +
ist
Since all the variables live on the state-year level, we can average over individuals (teenagers) within state-year
cells without any loss of information (need to weight by cell sizes to match exactly):

Y
st
=
s
+
t
+ (FA
s
D
t
) +
st
We can get rid of the state xed eect by rst-dierencing the data:

Y
s,1990

Y
s,1989
= (
1990

1989
) +FA
s
+ (
s,1990

s,1989
)

Y
s
=

+FA
s
+
s
Card (1992) weights the dierenced equation according to the average sample size in the two periods. Running
the FE model and weighting according to the sample sizes in each state-year cell might work better (although
unlikely to matter much in practice).
5. See attached code.
8

cd "H: \ Teachi ng\ 14. 387_Spr i ng_2014\ Pr obl em_Set _2"

/ ***************/
/ * EXCERCI SE 3 */
/ ***************/

/ * Par t ( e) */

use "m_d_806. dt a", cl ear
desc
count
dest r i ng, r epl ace

r epl ace qt r mar =qt r mar - 1
gen yom= yobm+ agemar i f qt r bt hm<= qt r mar
r epl ace yom= yobm+ agemar + 1 i f qt r bt hm> qt r mar
gen dom_q = yom+ ( qt r mar / 4)
gen do1b_q = yobk + ( qt r bki d/ 4)
gen i l l egi t = 1 i f ( dom_q- do1b_q) >0

gen boy1st = ( sexk == 0)
gen boy2nd = ( SEX2ND == 0)
gen boys2 = ( ( sexk == 0) & ( SEX2ND == 0) )
gen gi r l s2 = ( ( sexk == 1) & ( SEX2ND == 1) )
gen samesex = ( ( boys2 == 1) | ( gi r l s2 == 1) )

gen yobd = 80 - aged i f qt r bt hd == 0
r epl ace yobd = 79 - aged i f qt r bt hd ! = 0

gen ageqm= 4*( 80- yobm) - qt r bt hm- 1
gen ageqd = 4*( 80- yobd) - qt r bt hd
gen agef st m= i nt ( ( ageqm- ageqk) / 4)
gen agef st d = i nt ( ( ageqd- ageqk) / 4)

gen mul t i 2nd = ( AGEQ2ND == AGEQ3RD)
gen mor eki ds = ki dcount > 2
gen wor kedm= ( weeksm> 0)

gen educm= gr adem- 3
r epl ace educm= gr adem- 2 i f f i ngr adm== 2 | f i ngr adm== 1
r epl ace educm= 0 i f educm< 0
gen hsgr ad = ( educm== 12)
gen mor et hs = ( educm> 12)
gen col l egegr ad = ( educm>= 16)

gen bl ackm= ( r acem== 2)
gen hi spm= ( r acem== 12)

keep i f aged ! = .
keep i f t i mesmar == 1
keep i f mar i t al == 0
keep i f i l l egi t ! = 1
keep i f agef st m>= 15
keep i f agef st d >= 15

keep i f agem>= 21 & agem<= 35
keep i f ki dcount >= 2 & ki dcount ! = .
keep i f AGEQ2ND > 4
keep i f asex == 0 & aage == 0 & ASEX2ND == 0 & AAGE2ND == 0 & aqt r br t h == 0

count

gl obal covs = "ageqmagef st mboy1st boy2nd"

est cl ear
r eg wor kedmmor eki d
est st o
pr obi t wor kedmmor eki ds
mf x
est st o
r eg wor kedmmor eki ds $covs
est st o
pr obi t wor kedmmor eki ds $covs
mf x
est st o
est t ab, b( 3) se( 3) compr ess mar gi n keep( mor eki ds)

est cl ear
i vr eg2 wor kedm( mor eki ds = samesex)
est st o
bi pr obi t ( wor kedm= mor eki ds) ( mor eki ds = samesex)
mf x comput e, pr edi ct ( pcond1)
est st o
i vr eg2 wor kedm( mor eki ds = samesex) $covs
est st o
bi pr obi t ( wor kedm= mor eki ds $covs) ( mor eki ds = samesex $covs)
mf x comput e, pr edi ct ( pcond1)
est st o
est t ab, b( 3) se( 3) compr ess mar gi n keep( mor eki ds)

/ ***************/
/ * EXCERCI SE 5 */
/ ***************/

use "i ndi vi d_f i nal . dt a", cl ear

gen above = ( di f shar e >= 0)
gen above_di f shar e = above*di f shar e
f or val i = 2/ 4{
gen di f shar e`i ' = di f shar e^`i '
gen above_di f shar e`i ' = above*di f shar e^`i '
}

l ogi t myout comenext above di f shar e* above_di f shar e*
mf x, at ( zer o)

r d myout comenext di f shar e, c( 0)

l ocal h_opt = . 1514835257991828
gen l ambda = ( 1 - abs( di f shar e/ `h_opt ' ) ) *( abs( di f shar e/ `h_opt ' ) <= 1)
r eg myout comenext above di f shar e above_di f shar e [ aw = l ambda] , r obust