This assignment accounts for 10% of your grade. It should follow an essay format, which means you must add an introduction, analysis and conclusion. The word limit of the text is 500. You should add tables as figures to avoid exceeding your word limit. You are encouraged to use at least Wooldridge (2012) in order to provide references for your tests and rationale.
Your task is to assess the most appropriate specification as displayed in Table 1. Such results are based on the data from Blackburn and Neumark (1992), which is found as WAGE2 in Wooldridge (2012). The econometric model is the following:
log(????????????????)=???? +???? ????????????????+???? ????????????????????+???? ????????????+???? ????????????2 +???? ????????????????????+???? ????????????????????+???? 0123456
Where wage is measured as monthly earning in U.S. dollars, and it is determined by years of education, years of experience, age in years and its squared value, black if the person is black and urban if the person lives in the Standard Metropolitan Statistical Area as a proxy for urban areas.
The weighted least squares (WLS) has a weight of 1/????????????????. The two-stage least squares (2SLS) uses the following variables as external instruments: mothers education, fathers education and the number of siblings. You should also assume that those instruments are valid and relevant.
TABLE1
First, you must select the most appropriate specification among the four [ordinary least squares (OLS), OLS with robust standard errors, WLS or the 2SLS]. Be specific on the steps you should take, the tests you should perform and their null hypothesis, and the reasoning behind the decisions you make on the selection process.
Second, after selecting the most appropriate model, you must interpret its results. You must mention the coefficients, statistical significance, R-squared and F-statistics (if appropriate). Be precise and explain the meaning and/or null hypothesis of each concept if necessary.
