ECONOMETRICS ASSIGNMENT
For this assignment, use the dataset eaef_as2.dta, which has 1200 observations, and is downloadable from SyD. The data contain information on wages and characteristics of workers in United States, in 2002. It includes a variable 'catgov' which indicates whether the person works for government.

TASK:

a) Estimate how much more or less workers on average earn when they work for government as opposed to private sector, holding their characteristics constant. Interpret the findings. [80%]

b) Assess whether government is a more 'meritocratic' employer. Do this by expanding the model in a) to test whether ability (asvabc) and years of schooling (s) have larger effect on earnings in government than in the private sector. Interpret the findings. [20%]

Practical notes:

It may be sensible to use a do-file (we'll cover this in class 7) to avoid retyping the regression commands multiple times. If you however prefer to work from the command line, note that by pressing ‘page up/down'-buttons you can get the previous commands to the command line - this may be the quickest way to modify the your estimation.

Points to keep in mind:

-Could you improve by making transformations to variables / assume non-linearity's?
-Could interactions help you improve the model?
-Are there outliers that distort your model?
-Can you rule out endogeneity of your explanatory variables?
-To tabulate 2 variables use tabulate. Example: tabulate female catgut
-To look up how a command works, use help, such as help regress.
-Are the key assumptions of OLS holding (note that some of them can't be directly tested)?
-Study the dataset and variables and think what you can and can't do with it.
-Do your results make sense to you? (No need for literature review or outside references!)

How to submit an answer?

The submitted answer should consist of maximum of 3-4 printed pages, using font size 10 or 12.
To align stata output nicely use Courier 10 Pitch, or Courier New font, and font size 10 in Word. For estimations in part a) and b) only add the 4 sections as shown on next page. Nothing more, please.

The next page is a simplified sample answer for part a). Answer should be in similar format in part b)

Grading is based on the overall sensibility of the preferred models, and their correct interpretation and testing. There is no one right answer for this assignment. Finally, while this is an open-ended project, don't ruin your life in search for perfection because it doesn't exist.

SAMPLE ANSWER for part a) (Note: This would not be an answer with high grade)

Candidate number 12345

1.  EXPLANATION OF CONSTRUCTED VARIABLES:

tenure2 = tenure^2 

2.  INTERPRETATION (Key findings, and rationale for the choice of the final model)

Working for government reduces earnings by 3 dollars per hour, given the control variables above. I have left out variables that weren't significant or interesting for wage determination. 

3.  DIAGNOSTIC TESTS FOR NORMALITY AND HETEROSCEDASTICITY

Command 'estat hettest' suggests I have heteroscedasticity, the null is rejected.

'sktest' on the residuals suggests that they are not normally distributed.

Attachment:- fwdtem1272011128_aliya_iskendirova_eco.zip