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ECON 256: Problem Set 2
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Instructions: Delete the red text and replace with your answers
Problem 1 Answers
1.a) The estimated coefficients and confidence intervals are (report to 2 decimal places)
Coefficient
𝜶
𝜷inst_qual
Variable
Constant
Institution Quality
Estimated Value
####
####
Lower Bound for 95%
Confidence Interval
####
####
Upper Bound for 95%
Confidence Interval
####
####
The correlation between log GDP per Capita (PPP) in 1995 and Institution Quality in 1900 is: ####
The interpretation of 𝛽inst in this regression is: [Write the interpretation here].
1.b) Fill in the below table. Only the last column will be graded for correctness.
Institution Quality in 1900
3.5
10
Predicted log GDP
per Capita in 1995
####
####
Predicted GDP per Capita
in 1995 (PPP, $/person)
####
####
1.c) [Write the reasoning behind using Settler Mortality as an instrumental variable for Institution
Quality]
The correlation between Settler Mortality is: ####
The new estimate of 𝛽inst_qual is: ####
[Write something about why the estimates differ between 1.a and 1.c]
1.d) The original regression in 1.a had ### observations. The IV regression in 1.c had ### observations.
The number of observations [increased/decreased/stayed the same] for the IV regression in 1.c
compared to the regression in 1.a.
If we re-run the regression in 1.a for only the observation included in the IV regression, we find the
following estimate of 𝛽inst_qual : #### [Write something about how much this estimate changes or does
not change relative to 1.a]
1.e) Fill in the below table. Report all numbers to two decimal places, except report the 𝛽indep_time
estimate to 3 decimal places. P-value column isn’t graded, but is useful for determining statistical
significance.
Coefficient
𝜶
𝜷inst_qual
𝜷indep_time
𝜷africa
𝜷latitude
𝜷landlock
Statistical Significance
P-value
at 0.05 level?
####
[Yes or No]
####
[Yes or No]
####
[Yes or No]
####
[Yes or No]
####
[Yes or No]
####
[Yes or No]
Variable
Estimated Value
Constant
####
Institution Quality
####
Years Since Independence
####
Africa Dummy
####
Latitude (Dist. from Equator)
####
Landlocked Dummy
####
The confidence interval on 𝛽inst_qual [increases/decreases/stays the same] relative to 1.c.
1.f) The estimate for 𝛽africa becomes: #### and it [is or is not] statistically significant.
Based on our results from 1.e, [write about whether institutions or geography seems more important for
development and why]
Further, our results from 1.e, [write about whether it seems there is something unexplained about the
development of countries in Africa]. The reason we need to use a IV approach to conclude this is
because [discuss how our results change between 1.e and the regression we ran for 1.f to find 𝛽africa,
and how we should interpret these differences].
Problem 2 Answers
2.a) The summary statistics are
Summary Statistics
Average Value
Standard Deviation
First Quartile
Third Quartile
Min Value
Max Value
Fixed Capital Share Labor Share
####
####
####
####
####
####
####
####
####
####
####
####
Intermediate Share
####
####
####
####
####
####
Sales/Costs
####
####
####
####
####
####
The most important factor of production is [Fixed Capital/Labor/Intermediate Inputs].
2.b) Our estimated value of 𝜎 is #### and the variables for the establishment with Factory ID 64082 are
Factory ID Code
64082
Capital Wedge
####
Revenue Wedge
####
Productivity (TFPQ)
####
TFPR
####
2.c) [Delete the density chart below and replace it with your own for India]
2.d) The value for 𝑌/𝑌Potential is: ####
The percent gain from eliminating misallocation is: ####
2.e) The potential gains from eliminating misallocation in Table IV of the paper are:
Country and Year
China in 2005
India in 1994
United States in 1997
Percent Gain from
Reducing Misallocation
####
####
####
[Give a few examples of misallocation or things that may cause misallocation]
[Write about why misallocation might be lower in the United States compared to India]