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

Exercise 11

Use the data in VOTE1.RAW for this exercise.

(i) Consider a model with an interaction between expenditures: voteA = ????0 + ????1prtystrA + ????2expendA + ????3expendB + ????4expendA.expendB + u. What is the partial effect of expendB on voteA, holding prtystrA and expendA fixed? What is the partial effect of expendA on voteA? Is the expected sign for ????4 obvious?

(ii) Estimate the equation in part (i) and report the results in the usual form. Is the interaction term statistically significant?

(iii) Find the average of expendA in the sample. Fix expendA at 300 (for $300,000).

What is the estimated effect of another $100,000 spent by Candidate B on voteA? Is this a large effect?

(iv) Now fix expendB at 100. What is the estimated effect of ?expendA = 100 on voteA? Does this make sense?

(v) Now, estimate a model that replaces the interaction with shareA, Candidate A’s percentage share of total campaign expenditures. Does it make sense to hold both expendA and expendB fixed, while changing shareA?

(vi) (Requires calculus) In the model from part (v), find the partial effect of expend on voteA, holding prtystrA and expendA fixed. Evaluate this at expendA = 300 and expendB = 0 and comment on the results.

Step 1 of 6

(i)

For the model:

The ceteris paribus effect of ExpendB on voteA is obtained by taking changes and holding

prtystrA , ExpendA, and u fixed:

It is assumed that ß₃< 0 if a ceteris paribus increase in spending by B lowers the share of the vote received by A. But the sign of ß₄ is ambiguous: Is the effect of more spending by B smaller or larger for higher levels of spending by A is unknown.