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

Exercise 9

Use the data in CARD.RAW for this exercise.

(i) In Table 15.1, the difference between the IV and OLS estimates of the return to education is economically important. Obtain the reduced form residuals, , from . (See Table 15.1 for the other variables to include in the regression.) Use these to test whether educ is exogenous; that is, determine if the difference between OLS and IV is s a is ically significant.

(ii) Estimate the equation by 2SLS, adding nearc2 as an instrument. Does the coefficient on educ change much?

(iii) Test the single overidentifying restriction from part (ii).

Step 1 of 4

(i)

Estimating the reduced form equation relating to

The result is:

Estimating the residuals from the difference of actual and estimated and use it as an explanatory variable in the original equation that relates to

The result is:

The coefficient of is 0.057 with the p-value 0.28 which is greater than the critical p-value of 0.05 at 5% level of significance, indicating that is not statistically significant at 5% level of significance. This also indicates that the difference between OLS and IV is not statistically significant.