Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 12

Consider a linear probability model for whether employers offer a pension plan based on the percentage of workers belonging to a union, as well as other factors:

pension = ?0 + ?1 percunion + ?2avgage + ?3avgeduc + ?4percmale + ?5percmarr + u1.

(i) Why might percunion be jointly determined with pension?

(ii) Suppose that you can survey workers at firms and collect information on workers' families. Can you think of information that can be used to construct an IV for

percunion?

(iii) How would you test whether your variable is at least a reasonable IV candidate for

percunion?

Step 1 of 3

Consider the linear probability model for whether employers offer a pension plan based on the percentage of workers belonging to a union as well as other factors, given by:

(i)

The variable would be jointly determined withbecause, with higher percentage of workers belonging to a union, the probability of employers offering a pension plan increases and the pension plan offered by the employers depends on the number of workers in the union