1. Use the data in CARD for this exercise.
(i) The equation we estimated in Example 15.4 can be written as log1wage2 5 b0 1 b1educ
1 b2exper
1 p 1
u, where the other explanatory variables are listed in Table 15.1. In order for IV to be consistent, the IV for
educ,
nearc4, must be uncorrelated with
u. Could
nearc4
be correlated with things in the error term, such as unobserved ability? Explain.
(ii) For a subsample of the men in the data set, an IQ score is available. Regress
IQ
on
nearc4
to check whether average IQ scores vary by whether the man grew up near a four-year college.
What do you conclude?
(iii) Now, regress
IQ
on
nearc4,
smsa66, and the 1966 regional dummy variables
reg662, …,
reg669. Are
IQ
and
nearc4
related after the geographic dummy variables have been partialled out?
Reconcile this with your findings from part (ii).
(iv) From parts (ii) and (iii), what do you conclude about the importance of controlling for
smsa66
and the 1966 regional dummies in the log(wage) equation?