Problems of Applied Econometrics: Michaelmas Term Alan Manning

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1 Problems of Applied Econometrics: Michaelmas Term Alan Manning Office: S675, x6078. Office Hour: Thurs This course has three aims: - to look at the interaction between economic theory and econometrics, emphasizing how economic theory can be used as a guide to how one should approach the statistical investigation of economic data. - to introduce a number of new econometric techniques and principles. - to illustrate the practical difficulties in using real data. The topic chosen is the Economics of Labour Supply but many of the ideas and techniques introduced are of use in other parts of economics. There will be 10 lectures and 5 classes over the course of the Michaelmas term. The classes will both go over empirical application of the techniques discussed in the course and more theoretical exercises. Over the Christmas vacation, there will be an assessed exercise. For an overview of the econometric techniques used in the course, the best single reference is: J.M. Wooldridge "Introductory Econometrics: A Modern Approach", chapter 17. But many other econometric textbooks also have similar chapters. Alternatives would be: J. Johnston and J dinardo "Econometric Methods", CC HB139 J71 chapter In addition, the latest version of Chris Dougherty's book has a draft chapter on binary choice models. It can be found at There are other readings on the subject area which also might be helpful: Summaries of Labour Supply Literature The best recent survey (though length and encyclopaedic containing far more material than is covered in the course) is: R. Blundell and T. MaCurdy "Labour Supply: a Review of Alternative Approaches", in O. Ashenfelter and D. Card (eds) Handbook of Labor Economics, vol. 3a. Also available at Shorter summaries can be found at: R. Blundell, "Labour Supply and Taxation: A Survey", Fiscal Studies, August 1992, HJ101 and OP P6494A.

2 J. Heckman, What Has Been Learned About Labor Supply in the Past Twenty Years?, American Economic Review Papers and Proceedings, May 1993, HB1 +CC+ OP P9765 and The following chapter also contains a mixture of material on theoretical and empirical aspects of labour supply: E. Berndt "The Practice of Econometrics" ch.11 CC HB139 B52. For those who are interested in recent discussion about the impact of the EITC (in the US) and WFTC (in the UK) on labour supply, the following references may be useful. Richard Blundell, Alan Duncan, Julian McCrae and Costas Meghir "The Labour Market Impact of the Working Families' Tax Credit", Fiscal Studies, March 2000, vol. 21, no. 1, pp , HJ101. A. Dilnot and J. Macrae "Family Credit and the Working Families Tax Credit", IFS Briefing Notes, available at N. Eissa and J. Liebman "Labor Supply Response to the Earned Income Tax Credit", Quarterly Journal of Economics; May 1996

3 Outline of Lectures 1. Introduction to Labour Supply Basic economic theory behind static model of labour supply. Going from economic theory to empirical specification. Overview of empirical problems that arise in econometrics of labour supply. 2. Sample Selection Bias I What goes wrong if we estimate labour supply curves only for those who work? 3. Binary Dependent Variables. Maximum Likelihood Estimation. Logit and Probit models. 4. Censored and Truncated Regression Models Tobit. 5. Sample Selection Bias II Heckit. Cogan model of fixed costs. 6. Review of Recent Work on impact of tax/benefit reforms (if time allows).

4 Lent Term Steve Pischke Office: Q365, x6509. Office Hour: Monday 2:30-4:30 This part of the course will deal with the evaluation problem in the social sciences: how can we use data to learn about outcomes, which are not directly observed? Many, if not most empirical questions in economics and other social sciences, in medicine, in business, etc. can be formulated as an evaluation problem. This goal of this part of the course is therefore: to introduce the evaluation problem and various approaches to solving it to illustrate these approaches with empirical examples to introduce a number of new econometric techniques and principles. The topics are primarily chosen from labour economics and the evaluation social policy. There will be 10 lectures and 5 classes over the course of the Lent term. The classes will both go over empirical application of the techniques discussed in the course and more theoretical exercises. Over the Easter vacation, there will be an assessed exercise. For an overview of the econometric techniques used in the course, the best single reference is: J. D. Angrist and A. B. Krueger Empirical Strategies in Labor Economics, chapter 23 in Handbook of Labor Economics, O. Ashenfelter and D. Card (eds.), vol 3A, especially section 2 (referred to as AK below). Other useful references are: J.M. Wooldridge "Introductory Econometrics: A Modern Approach", chapters J. Johnston and J. DiNardo Econometric Methods, CC HB139 J71 chapter Background reading: P. Holland, Statistics and Causal Inference, Journal of the American Statistical Associaton, vol. 81, 1986, , with discussion. D. T. Campbell, Reforms as Experiments, American Psychologist, vol. 24. April 1969, Angrist, J.D., Introduction to the JBES Symposium on Program and Policy Evaluation, Journal of Business and Economic Statistics, April Bruce Meyer, Natural and Quasi-Experiments in Economics, Journal of Business and Economic Statistics, April [references in square brackets refer to library offprint collection]

5 Lectures and Readings: 1. The Evaluation Problem: Introduction (AK, section 2.1) 2. Randomised Experiments A. Krueger, Experimental Estimates of Education Production Functions, Quarterly Journal of Economics, vol 114, May 1999, [P7616a/b] 3. Observational Studies, Matching, and Regression (AK, sections 2.2.1, 2.3.1, and 2.3.2) J. Angrist Estimating the Labor Market Impact of Voluntary Military Service Using the Social Security Data on Military Applicants, Econometrica, vol. 66, 1998, [P7251a/b] 4. Matching and the Propensity Score (AK, section 2.3.3) R. Dehejia and S. Wahba, Causal Effects in Nonexperimental Studies: Re-evaluating the Evaluation of Training Programs, Journal of the American Statistical Associaton, vol. 94 Sept [P7618a/b] 5. Differences-in-Differences (AK, sections and 2.4) D. Card, Using Regional Variation to Measure the Effect of the Federal Minimum Wage, Industrial and Labor Relations Review, vol. 46, October 1992, [P6360a/b] 6. Panel Data and Fixed Effects (AK, section 2.2.2) R. Freeman Longitudinal Analyses of the Effect of Trade Unions, Journal of Labor Economcis, vol 3, 1984, 1-26 [P6627a/b] 7. Some Randomization and Noncompliance J. Hotz, S. McElroy, and S. Sanders Teenage Childbearing and Its Life Cycle Consequences: Exploiting a Very Natural Experiment, manuscript, UCLA, July 2000 [P206a/b] 8. Instrumental Variables (AK, section 2.2.3) J. Angrist, G. Imbens, and D. Rubin, Identification of Causal effects Using Instrumental Variables, with comments, Journal of the American Statistical Associaton, 1996 [P6047a/b] J. Angrist and A. Krueger Does Compulsory School Attendance Affect Schooling and Earnings? Quarterly Journal of Economics, vol. 106, November 1991, [P10693a/b] 9. Regression Discontinuity (AK, section 2.2.4) J. Angrist and V. Lavy, Using Maimonides Rule To Estimate the Effect of Class Size of Scholastic Achievement, Quarterly Journal of Economics, vol 114, May 1999, Do We Need Social Experiments? Burtless and Heckman exchange in Spring 1995 Journal of Economic Perspectives.