Angrist and Krueger (1991) establish a relationship between the quarter of birth and educational attainment because of school start age policy and compulsory school attendance laws. (a) Under what assumptions is the quarter of birth (i.e., a dummy variable for being born in January-March of a year) a legitimate instrumental variable (IV) for education in an earnings equation? (b) Some research shows that older age at school entry may positively affect academic performance. Does this finding indicate a potential threat to Angrist and Krueger (1991)'s methodology? Please explain your answer. (c) More specifically, they estimate the following regression using a IV approach: In W₁ = a + ẞEi + €i where Wi is individual i's weekly wage, Ei is the years of education, and ɛi is the error term. A dummy variable for being born in January-March of a year is used as an IV for Ei. When the IV is a dummy variable, the IV estimator is also called the Wald estimator, which can be easily obtained using sample means. The following table reports the average log weekly wage and the average years of education for individuals who were born in the 1st quarter of a year (column 1) and those who were born in the 2nd, 3rd, or 4th quarter of a year (column 2). Based on the information, calculate the IV estimate of ẞ. Show the work when calculating the estimate and do not just present the final number. (1) Born in 1st quarter of year (2) Born in 2nd, 3rd, or 4th quarter of year (3) Differences (1)-(2) In(weekly wage) 5.15 5.16 Years of education 11.40 11.53 Wald estimate OLS estimate 0.08 How do you interpret the IV estimate? (e) What does the IV estimate represent in this context (in terms of local average treatment effect)? (f) Suppose the government is considering adjusting university tuition fees according to the economic returns to education. You are asked to review studies in economics literature and come up with a reasonable estimate of the economic returns to an additional year of college education. Will you use Angrist and Krueger (1991) for this task and why?

Angrist and Krueger (1991) establish a relationship between the quarter of birth and educational attainment because of school start age policy and compulsory school attendance laws. (a) Under what assumptions is the quarter of birth (i.e., a dummy variable for being born in January-March of a year) a legitimate instrumental variable (IV) for education in an earnings equation? (b) Some research shows that older age at school entry may positively affect academic performance. Does this finding indicate a potential threat to Angrist and Krueger (1991)'s methodology? Please explain your answer. (c) More specifically, they estimate the following regression using a IV approach: In W₁ = a + ẞEi + €i where Wi is individual i's weekly wage, Ei is the years of education, and ɛi is the error term. A dummy variable for being born in January-March of a year is used as an IV for Ei. When the IV is a dummy variable, the IV estimator is also called the Wald estimator, which can be easily obtained using sample means. The following table reports the average log weekly wage and the average years of education for individuals who were born in the 1st quarter of a year (column 1) and those who were born in the 2nd, 3rd, or 4th quarter of a year (column 2). Based on the information, calculate the IV estimate of ẞ. Show the work when calculating the estimate and do not just present the final number. (1) Born in 1st quarter of year (2) Born in 2nd, 3rd, or 4th quarter of year (3) Differences (1)-(2) In(weekly wage) 5.15 5.16 Years of education 11.40 11.53 Wald estimate OLS estimate 0.08 How do you interpret the IV estimate? (e) What does the IV estimate represent in this context (in terms of local average treatment effect)? (f) Suppose the government is considering adjusting university tuition fees according to the economic returns to education. You are asked to review studies in economics literature and come up with a reasonable estimate of the economic returns to an additional year of college education. Will you use Angrist and Krueger (1991) for this task and why?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter4: Estimating Demand

Section: Chapter Questions

Problem 1.3CE

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