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

Exercise 18

Use the entire panel data set in AIRFARE.RAW for this exercise. The demand equation in a simultaneous equations unobserved effects model is

log(passenit) = ?t1 + ?log(fareit.) + ai1 + uit1,

where we absorb the distance variables into ai1.

(i) Estimate the demand function using fixed effects, being sure to include year dummies to account for the different intercepts. What is the estimated elasticity?

(ii) Use fixed effects to estimate the reduced form

log(fareit) = ?t2 + ?21concenit + ai2 + vta2.

Perform the appropriate test to ensure that concenit can be used as an IV for log(fareit).

(iii) Now estimate the demand function using the fixed effects transformation along with IV, as in equation. Now what is the estimated elasticity? Is it statistically significant?

Equation

Step 1 of 4

The demand equation in a simultaneous equations unobserved effects model is given by:

(i)

Estimating the demand function using fixed effects including the year dummies to account for the different intercepts and individual fixed effects, the result is:

The estimated elasticity is given by the coefficient of which is -1.155039