Economics 105 Statistics Mark C. Foley Aug - Dec 2006 Modeling Presentations The goal of this group project is to develop a regression model to answer one of the research questions below. You will not be estimating the regression. This is a modeling exercise. You should use economic theory, peer-reviewed literature, and your own intuition and knowledge to build a well-specified econometric model of the following form (1) Yi = β 0 + β 1 X 1i + β 2 X 2i + ... + β K X Ki + ε i where Y is the dependent variable, whose variation you are trying to explain with the independent (explanatory) variables, X 1 , X 2 ,..., X K , and ε represents random error. The subscript i indexes observations on the unit of analysis, which can be individuals, states, cities, countries, or firms (called cross-sectional data), depending on the research question, or it could index a time period such as months, quarters, or years if the research question is estimating a relationship over time (called time-series data). Note that the generic model above does not specify the full number of explanatory variables (the X’s); it uses K to indicate the last explanatory variable. That is what you are to determine for your chosen research question. In other words, you decide how many, and which, explanatory variables to include. The model is a multiple regression. Typically, there is one “variable of interest” in a research paper. A simple regression is not adequate to capture the effect of that “variable of interest” on the outcome since it, by virtue of having only 1 explanatory variable, does not control for other factors which influence the dependent variable. In other words, a simple regression does not impose the idea of ceteris paribus. A multiple regression model does. You are interested in the effect of one variable, the “variable of interest,” on the dependent variable, holding all other relevant factors constant. In particular, you, as the researcher, are interested in the sign, magnitude, statistical significance, and economic significance of the estimated coefficient on the variable of interest, but you can’t address these without actually estimating the model. 1 Requirements The assignment is to give a 15-minute oral presentation using Powerpoint in which you present and justify an econometric model to answer your research question. There are 6 groups and 3 topics. I’ve allocated two lab periods for the presentations and discussion. With two groups doing each topic, the three “winning” groups will receive a grade bonus. In addition, groups must ask at least two questions of the presenters. I’ll let you know when your group is responsible for asking questions. You can decide before class who will ask a question. The quality of the questions will factor into your group’s grade. One, two, three, or all group members may participate in the presentation. All group members should participate in developing the content for the slides. There will be one grade for the whole group. Please bring a printout of your slides (printed two per page, front and back) to class on the day of the presentation, and given it to me before you start. The grade for the assignment will be based on the clarity, content, and correctness of the presentation and the slides. Research Questions You will be assigned to a group and one of these broad research questions. (A) (B) (C) What is the effect of more police on crime? Does smaller class size lead to better student performance? What is the effect of children on a female labor market outcome? Here you can choose any dependent variable which is a “female labor market outcome,” such as wages, hours worked, labor force participation, number of jobs, etc. Your group should discuss the general topic and then, as a group, decide on a specific research question to address. I. Motivation (1-2 slides) Introduce and motivate the topic by stating the specific research question and why it is important. Incorporate “big picture” stylized facts or statistics to help place your study in context and provide motivation for asking the research question. For example, if you are modeling the effect of class size on student performance, it would be useful to find data on the average class size and how it has been changing over time. Or if you were looking at the effect of welfare on employment, for example, it would be useful for the reader to know the total amount of money the government spends on welfare (last year, in an average year, or for some reasonable and relevant time frame) and what percent of the budget that represents. Additional motivation can be provided by discussing the public policy implications of having accurate answers to the question. 2 II. Literature Review (2-3 slides) Have other people studied this issue or one related to it (in particular, search the peer-reviewed literature with broad enough key words to find appropriate studies), and what conclusions did they reach? Where does one look for peer-reviewed literature? This is copied from the following webpage (go to library’s main page, then “Indexes & Databases”, then choose “All Indexes and Databases”): http://www.davidson.edu/administrative/library/refer/indexes.asp?dbtype=All&search=Submit+Query • EconLit (1969 to present ) Provides bibliographic citations and selected abstracts to journal articles from 326 journals; also indexes doctoral dissertations, books, and conference proceedings. Areas covered include economic theory and history, monetary theory and financial institutions, labor economics, and international, regional, and urban economics. • Academic Search Premier (1975 to present) Indexes over 8,000 popular and scholarly periodicals and provides the full text of articles from 4,500 of these periodicals. Also indexes several newspapers, including the Christian Science Monitor, New York Times, and the Wall Street Journal 1. Click on the "Basic Search" tab at the top. 2. Check the "Scholarly (Peer Reviewed) Journals" option. • Business Source Premier (1965 to present) Provides the full text of articles from over 8,800 periodicals, including more than 1,100 peer-reviewed journals and 1,200 trade journals and business magazines; also includes over 3,800 industry reports, 500 market research reports, and 140 books. 1. Click on the "Advanced Search" tab at the top. 2. Check the "Scholarly (Peer Reviewed) Journals" option. • JSTOR (Journal Storage), A searchable archive of the back issues of major scholarly journals, which includes premier economics and finance journals from their initial publication to their "moving wall" (usually 2-5 years ago). 1. Select “Search” 2. Select “Advanced Search” (it’s in small letters on the right-hand side) 3. Sometimes it helps to limit your search to words in the title of an article. Do so by checking the “Title” checkbox. 4. Scroll down and check the box next to Economics.and/or Finance. • NBER Working Papers (1994 to present) Full text of working papers published by the National Bureau of Economic Research (NBER), a private, non-profit, nonpartisan research organization based in Cambridge, Massachusetts. NBER published approximately 500 working papers each year, and many subsequently appear in scholarly journals. These are not peer-reviewed in the traditional sense, but they are of such high quality that you can use them, and are encouraged to do so. Be sure to cite all authors of a publication, not just the lead author. It is not sufficient to read only the abstract and cite the whole article. You should have (at least) 4 peer-reviewed articles in this section. 3 Create slides which note the following for each paper: 1. Author(s), year of publication, and journal (see list below for abbreviations of main journals) 2. Data used (including sample size and description of the sample group) 3. Time period – what year is outcome measured, what year are key explanatory variables measured. 4. Definition of outcome variable, including the unit of observation. 5. Methodology (OLS, GLS, 2SLS, IV, probit, logit, etc.) I realize that you only know OLS. 6. List of independent variables included in the regressions 7. Coefficient estimate & standard error or t-stat for the variable of interest. See pages 1845 - 1849 and 1858 – 1862 and 1864 - 1868 of Haveman and Wolfe (1995), “The Determinants of Children’s Attainments,” Journal of Economic Literature, vol. 33, pp. 1829 – 1878. There is a copy of this paper in the P: space you use for lab. III. Model Development (about 3 slides) Carefully develop the theory that you are testing in the context of a linear regression model as given in equation (1). In this section, be sure to: 1. Clearly explain which variables are the independent variables and which is the dependent variable. 2. Justify why each variable is included, and indicate its expected sign (positive, negative, or indeterminate – two competing effects) 3. Define the units of all variables. 4. Note any potentially endogenous explanatory variables and explain why they might be endogenous. You will find several journal articles on your topic, each with different model specifications. Your final theoretical model should be a combination of these, plus your own ideas. It’s okay to follow closely a model in one of the papers (they don’t often state explicitly why each variable is included), but you should argue why the variables included in other papers do not belong in your study. Or perhaps you think the previous research has left out an important variable; if so, argue for its inclusion. Do not just state that you think “variable X” belongs in the model. Tell me why. 4 The following are among the higher quality journals in economics (typical abbreviation): American Economic Review (AER – generally regarded as the top journal; rest of list is not in rank order) Applied Economics Letters B.E. Journals in Economics Analysis and Policy Brookings Papers on Economic Activity (BPEA) Brookings Papers on Economic Activity: Microeconomics Canadian Journal of Economics Economics Letters Economic Transition European Economic Review (EER) Explorations in Economic Hisotry (EEH) Industrial and Labor Relations Review Journal of Applied Econometrics (JAE) Journal of Business and Economic Statistics (JBES) Journal of Economic History (JEH) Journal of Finance (JoF) Journal of Health Economics (JHE) Journal of Human Resources (JHR) Journal of International Economics (JIE) Journal of Labor Economics (JoLE) Journal of Law and Economics (JLawE) Journal of Money, Credit, and Banking (JMCB) Journal of Political Economy (JPE) … top 3 journal Journal of Public Economics (JPubE) Journal of Sports Economics (JSportE) Journal of Urban Economics (JUrbanE) Quarterly Journal of Economics (QJE) … top 3 journal. Review of Economic Studies (REStud) Review of Economics and Statistics (REStat) Journal of Economic Perspectives (JEP) … especially readable for undergraduates. Journal of Economic Literature (JEL) A longer list is here http://www.oswego.edu/~economic/journals.htm. 5