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1、 2013 Cengage Learning.All Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Chapter 13 Pooling Cross Sections across Time:Simple Panel Data MethodsWooldridge:Introductory Econometrics:A Modern Approach,5e 2013 Cengage Learning.All
2、 Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Policy analysis with pooled cross sectionsTwo or more independently sampled cross sections can be used to evaluate the impact of a certain event or policy changeExample:Effect of n
3、ew garbage incinerator on housing pricesExamine the effect of the location of a house on its price before and after the garbage incinerator was built:After incinerator was builtBefore incinerator was builtPooled Cross Sections and Simple Panel Data Methods 2013 Cengage Learning.All Rights Reserved.M
4、ay not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Example:Garbage incinerator and housing prices(cont.)It would be wrong to conclude from the regression after the incinerator is there that being near the incinerator depresses prices so stronglyOne
5、has to compare with the situation before the incinerator was built:In the given case,this is equivalent toThis is the so called difference-in-differences estimator(DiD)Incinerator depresses prices but location was one with lower prices anywayPooled Cross Sections and Simple Panel Data Methods 2013 C
6、engage Learning.All Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Difference-in-differences in a regression frameworkIn this way standard errors for the DiD-effect can be obtainedIf houses sold before and after the incinerator
7、was built were sys-tematically different,further explanatory variables should be includedThis will also reduce the error variance and thus standard errorsBefore/After comparisons in natural experiments“DiD can be used to evaluate policy changes or other exogenous eventsDifferential effect of being i
8、n the location and after the incinerator was builtPooled Cross Sections and Simple Panel Data Methods 2013 Cengage Learning.All Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Policy evaluation using difference-in-differencesComp
9、are the difference in outcomes of the units that are affected by the policy change(=treatment group)and those who are not affected(=control group)before and after the policy was enacted.For example,the level of unemployment benefits is cut but only for group A(=treatment group).Group A normally has
10、longer unemployment durations than group B(=control group).If the diffe-rence in unemployment durations between group A and group B becomes smaller after the reform,reducing unemployment benefits reduces unemployment duration for those affected.Caution:Difference-in-differences only works if the dif
11、ference in outcomes between the two groups is not changed by other factors than the policy change(e.g.there must be no differential trends).Compare outcomes of the two groups before and after the policy changePooled Cross Sections and Simple Panel Data Methods 2013 Cengage Learning.All Rights Reserv
12、ed.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Two-period panel data analysisExample:Effect of unemployment on city crime rateAssume that no other explanatory variables are available.Will it be possible to estimate the causal effect of unemp
13、loyment on crime?Yes,if cities are observed for at least two periods and other factors affecting crime stay approximately constant over those periods:Unobserved time-constant factors(=fixed effect)Other unobserved factors(=idiosyncratic error)Time dummy for the second periodPooled Cross Sections and
14、 Simple Panel Data Methods 2013 Cengage Learning.All Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part.Example:Effect of unemployment on city crime rate(cont.)Estimate differenced equation by OLS:Subtract:Secular increase in crime+
15、1 percentage point unemploy-ment rate leads to 2.22 more crimes per 1,000 people Fixed effect drops out!Pooled Cross Sections and Simple Panel Data Methods 2013 Cengage Learning.All Rights Reserved.May not be scanned,copied or duplicated,or posted to a publicly accessible website,in whole or in part
16、.Discussion of first-differenced panel estimatorFurther explanatory variables may be included in original equationNote that there may be arbitrary correlation between the unobserved time-invariant characteristics and the included explanatory variablesOLS in the original equation would therefore be inconsistentThe first-differenced panel estimator is thus a way to consistently estimate causal effects in the presence of time-invariant endogeneityFor consistency,strict exogeneity has to hold in the
