The Effect of Military Service on Human Capital - IT Assignment Help

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Task:

1 Theoretical Problems 
1. Suppose a researcher is interested in the effect of military service on human capital. Ile collects data from a rand sample of workers aged 40 and estimates the regression model Y — + AIX + U, where Y is log of earnings and Xis a binary variable that is equal to 1 if the pensm served in the military and is equal to 0 otherwise. 

(a) Explain why the OLS estinuttiw are likely to be unreliable.

(b) During the Vietnam War there was a draft, where priority for the draft was determined by a national lottery. Birthdays were randomly selected and ordered 1 through 365. Those with birthdatee ordered first were drafted before those with birthdates ordered wxvintl, mai so forth. F.xplain how the lottery might be used as all instrument to estimate the effect of military senice on earnings.

(c) Let Z be a binary variable that is equal to I if the person were selected by the lottery and is 0 otherwise. Use Z as an IV for X. Show that the IV estimator can be writen as lc& — Yu where yy and ry are the sample averages of yi and xi over the part of the sample with z, 0; and where 171 and 71 are the wimple average.; of y, and xi over the part of the sample with I. This estimator is known as grouping estimator and was first proposed by Wald in the ills.' 

2 Computer Based Problems 1. Use the data set "CEOSAL2.dta". It contains data on chief executive officers for U.S. corpo-rations. The variable salary is the annual compensation, in thousands of dollars: the variable orogen is the prior number of years as company CEO; and profits is measured in millions. 

(a) Estimate a constant elasticity model relating au al wslary to firm sakes, market value, profits and CEO tenure (but keep both profits and CEO tenure in levels). What is the 
lilts is also known as the Local Average treatment kited (LATE).  estimated percentage return for another year of CEO tenure, holding other factors fixed? Is is statistically different from zero at 5% level? What would be 'fur conclusion if you omitted from the regression the firm performance measurements (sales, market value and profits)?

(b) Return to the multiple regression model. Interpret the coefficients on market value and profits. Are they significantly different from zero at 5% level? Find the sample cone-lation between log of market value and profits. Are these variables highly correlated? What does it say about the OLS estimators? Finally, test if these variables are jointly significant at both 5% level and 10% level in the regression.

(c) Use the hetensIcedastic-robust standard error. Does it change the impact (and the statistical significance) of CEO tenure on earnings?

(d) Explain step by step how you would the test for heterosloedasticity in STATA. Do you find evidence of hetereskedasticity in this data? 

2. This question is based on Dane Acemoglu. Simon Johnson and James Robinson paper: "The Colonial Origins of Comparative Development An Empirical Investigation." published in 2001 at the American Economic Review. Use the data "acemoglu-robinson dta.” The objective in this exercise is to estimate the effects of institutions on economic develop-ment. The authors want to test the idea that institutions matter' for economic growth, in particular that countries with more secure protection of property rights have an advantage in encouraging capital accumulation. The data set consists of their base sample of del ex-colonies. The variables are: countryn (country name), shortnam (country abbreviation), Igdp (log of GDP per capita in 1995), logmort (log of settler mortality), latitude (absolute latitude of capital), prot (protec-tion against expropriation, which is a measure of protection of property rights: the higher the value, the stronger the protection), euro (proportion of population of European descent in 1975). 

(a) Rtgsyss log of GDP per capita on prot. What is the return to the protection right? Is it statistically different from zero? Do you expect that your regression provides an unbiased estimate for the impacts of protection rights on the GDP per capita? OBS: Do not forget to use robust-se. 
 

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