Econometrics 206-1

Exam III: 10.10 AM -11.40 AM, 24 April 2017

Mayank Adlakha

In answering these below, paste the Stata output only when it is asked. When
pasting output, use the copy as picture option. When testing a hypothesis, be sure
to mention the distribution of the test statistic, its degrees of freedom, the level of
significance and the associated critical value. DO NOT USE THE STATA test
COMMAND.

It would be easiest if you inserted your answer between the questions below and
returned this document. Rename the document as `your name.docx’ and upload it
on LMS.

You have to do this exam by yourself. You are allowed to consult the textbook and
your notes. You are NOT allowed to consult anybody whether by speaking, by text
messages or email or any other means. Violations will attract penalties as per
Ashoka policy.

1. (a) Regress log of wages on a constant and the female dummy. Paste
output here.

. regress lnwage female

Source SS df MS Number of obs = 1,000

F(1, 998) = 181.25
Model 140.049853 1 140.049853 Prob > F = 0.0000
Residual 771.131872 998 .772677226 R-squared = 0.1537
Adj R-squared = 0.1529
Total 911.181724 999 .912093818 Root MSE = .87902

lnwage Coef. Std. Err. t P>|t| [95% Conf. Interval]

female -.8553218 .0635312 -13.46 0.000 -.9799919 -.7306516

_cons 4.12635 .0322699 127.87 0.000 4.063026 4.189675

(b) Interpret the coefficient on the female dummy.

The coefficient on the female dummy is -.8553218. Since the coefficient is a

negative integer, this indicates that for a 1% increase in the female dummy
variable, there will be a decrease in the log(wage) by -.8553218*100= 85.5%
decrease approximately, under the ceteris paribus condition.
(c) Test the null hypothesis that the coefficient on female dummy is -0.5 against
the alternative that the coefficient on female dummy is less than -0.5. Show your
workings.
[5+5+10]

Finding the t-statistic for the following question gives,

t= (Betajhat – aj)/se(Betajhat)
Therefore, as we found earlier, Betajhat = -.8553218 while se(Betajhat) =
.0635312

By plugging the following integers,

t= (-.8553218 – (-0.5))/ 0.063512

Therefore.

t= -5.594 (approximately to 3 decimal places)

This value is statistically significant at the 10% significance level, but not at the
5% or 1% level. Thus, the null hypothesis that the coefficient on female dummy
is -0.5 can be rejected at the 10% level, but not at the 5% or 1% significance
level.

2. (a) Regress log of wages on a constant, the female dummy, age of the
individual and the square of age. Paste your output here.

. regress lnwage female age age2

Source SS df MS Number of obs = 1,000

F(3, 996) = 95.62
Model 203.744072 3 67.9146908 Prob > F = 0.0000
Residual 707.437652 996 .710278767 R-squared = 0.2236
Adj R-squared = 0.2213
Total 911.181724 999 .912093818 Root MSE = .84278

lnwage Coef. Std. Err. t P>|t| [95% Conf. Interval]

female -.8576719 .0609852 -14.06 0.000 -.9773461 -.7379977

age .0634126 .0103899 6.10 0.000 .0430241 .0838011
age2 -.0006079 .0001343 -4.53 0.000 -.0008714 -.0003445
_cons 2.748186 .1880344 14.62 0.000 2.379197 3.117175

(b) Controlling for age and the square of age does not seem to substantially
change the coefficient of the female dummy. Why is that so?
[5+5]

This is due to collinearity between age and square of age with female dummy.
Age and square of age do not have significant collinearity with female dummy,
thus it’s coefficient is not substantially changed. The correlation between female
dummy and age is 0.0269 while the correlation between female dummy and the
square of age is 0.0346. As we can see, they do not have a significant or high
correlation.

3. (a) Regress log of wages on a constant, the female dummy, age of the
individual the square of age and the social group dummies for scheduled caste,
for scheduled tribe and for other backward caste. Note the omitted category is
the general castes (or forward castes). Paste your output here.

. regress lnwage female age age2 scd std obc

Source SS df MS Number of obs = 1,000

F(6, 993) = 56.37
Model 231.515509 6 38.5859182 Prob > F = 0.0000
Residual 679.666215 993 .684457417 R-squared = 0.2541
Adj R-squared = 0.2496
Total 911.181724 999 .912093818 Root MSE = .82732

lnwage Coef. Std. Err. t P>|t| [95% Conf. Interval]

female -.807476 .0605312 -13.34 0.000 -.9262597 -.6886923

age .0605878 .0102103 5.93 0.000 .0405516 .0806241
age2 -.0005791 .0001319 -4.39 0.000 -.0008379 -.0003202
scd -.4413509 .0755029 -5.85 0.000 -.5895144 -.2931873
std -.2481139 .0887235 -2.80 0.005 -.4222209 -.0740068
obc -.3809426 .0708538 -5.38 0.000 -.519983 -.2419022
_cons 3.085829 .1928521 16.00 0.000 2.707385 3.464274

(b) Test the null hypothesis that none of the social group dummmies matter, i.e.,
controlling for sex, age and square of age, the average of log wages is the same
for all categories: scheduled castes, scheduled tribes, other backward castes and
the general (forward) castes. Do NOT use the Stata test command.

We need to find the F-statistic in this case.

Therefore,

F= (R^2ur – R^2r)/q
_____________________
(1-R^2ur)/ df ur

Therefore, by using STATA techniques we find that,

R^2ur = 0.2541
R^2r = 0.2236
q= 3
df ur= n-k-1 = 1000-6-1 = 993

Thefore,
F value = 0.000137

This value is statistically insignificant for the 10%, or 5% or even the 1%

significance level. Thus, we fail to reject the null hypothesis. In other words, none
of the social group dummy variables matter with regard to log wages.

(c) Test the null hypothesis that relative to the general (forward) castes,
scheduled castes and other backward castes suffer the same extent of
discrimination. If this requires new regressions, paste the output in your
answer.
[5+15+15]

In this case, the null that forward castes suffer the same extent of discrimination
as scheduled castes and other backward castes is rejected. This is because the p-
value is very small, close to zero. This indicates that the data is statistically
significant, wherein we can reject the null hypothesis.

4. (a) Regress log of wages on a constant, the female dummy, age of the
individual the square of age, the social group dummies for scheduled caste, for
scheduled tribe and for other backward caste, and the education dummies for
illiterate, literate, primary, secondary, and higher secondary. Paste the output
here.

. regress lnwage female age age2 scd std obc illiterate literate primary second
> ary higher_secondary

Source SS df MS Number of obs = 1,000

F(11, 988) = 85.16
Model 443.473774 11 40.3157976 Prob > F = 0.0000
Residual 467.707951 988 .473388614 R-squared = 0.4867
Adj R-squared = 0.4810
Total 911.181724 999 .912093818 Root MSE = .68803

lnwage Coef. Std. Err. t P>|t| [95% Conf. Interval]

female -.6287476 .0524421 -11.99 0.000 -.7316584 -.5258369

age .0434705 .0086153 5.05 0.000 .026564 .0603769
age2 -.0003424 .0001108 -3.09 0.002 -.0005599 -.000125
scd -.2332977 .0636376 -3.67 0.000 -.3581781 -.1084173
std -.0939275 .0744076 -1.26 0.207 -.2399427 .0520876
obc -.2183765 .0596753 -3.66 0.000 -.3354813 -.1012716
illiterate -1.579581 .082054 -19.25 0.000 -1.740601 -1.418561
literate -1.302972 .0962819 -13.53 0.000 -1.491913 -1.114032
primary -1.303007 .0929865 -14.01 0.000 -1.485481 -1.120534
secondary -.9743013 .0859749 -11.33 0.000 -1.143016 -.8055869
higher_sec~y -.4865914 .1186415 -4.10 0.000 -.7194097 -.253773
_cons 4.334187 .1815994 23.87 0.000 3.977822 4.690552

(b) Compare the above regression with the regression in question 3 (without the
education dummies). Does the inclusion of education dummies alter the
discrimination against women, scheduled castes, scheduled tribes and other
backward castes? Why?
[5+15]

The inclusion of education dummies decreases discrimination against women,

scheduled castes, schedules tribes and other backward castes. For example,
without education, females have a wage which is less than 8% a male’s wage. But
after the inclusion of education, females earn approximately 6% less than a male.
The discrimination against scheduled tribes, scheduled castes, and other
backward castes also decrease in the same manner. This is because education
and social groups have a high correlation, and education, in a sense, has the
capacity to empower backward castes and tribes.
5. (a) To the explanatory variables in the regression in Qn 4(a), add land owned
(LandO) and land possessed (LandP) and re-run the regression. DO NOT paste
the output.

(b) Is either of the land variables individually significant at the 5 or 10% level?

Neither of the land variables are individually significant at the 5 or 10%

significance level.

(c) Now drop land owned (LandO) and re-run the regression. Is the included
land variable significant at the 5 or 10% level?

The included land variable is significant both at the 5% and 10% level.

(c) Explain the pattern of results observed in (a) and (b).

There is a very high correlation between land owned and land possessed. Thus,
when we drop the land owned variable, the land possessed variable is
statistically significant. They have 0.97 correlation approximately.
[4+4+7]