Economics 20 - Prof,Anderson 1
Summary and Conclusions
Carrying Out an Empirical Project
Economics 20 - Prof,Anderson 2
Choosing a Topic
Start with a general area or set of questions
Make sure you are interested in the topic
Use on-line services such as EconLit to
investigate past work on this topic
Narrow down your topic to a specific
question or issue to be investigated
Work through the theoretical issue
Economics 20 - Prof,Anderson 3
Choosing Data
Want data that includes measures of the
things that your theoretical model imply are
important
Investigate what type of data sets have been
used in the past literature
Search for what other data sets are
available (for example,ICPSR)
Consider collecting your own data
Economics 20 - Prof,Anderson 4
Using the Data
Create variables appropriate for analysis
For example,create dummy variables from
categorical variables,create hourly wages,
etc,
Check the data for missing values,errors,
outliers,etc,
Recode as necessary,be sure to report what
you did
Economics 20 - Prof,Anderson 5
Estimating a Model
Start with a model that is clearly based in
theory
Test for significance of other variables that
are theoretically less clear
Test for functional form misspecification
Consider reasonable interactions,
quadratics,logs,etc,
Economics 20 - Prof,Anderson 6
Estimating a Model (continued)
Don’t lose sight of theory and the ceteris
paribus interpretation – you need to be
careful about including variables that
greatly alter the interpretation
For example,effect of bedrooms
conditional on square footage
Be careful about putting functions of y on
the right hand side – affects interpretation
Economics 20 - Prof,Anderson 7
Estimating a Model (continued)
Once you have a well-specified model,
need to worry about the standard errors
Test for heteroskedasticity
Correct if necessary
Test for serial correlation if there is a time
component
Correct if necessary
Economics 20 - Prof,Anderson 8
Other Problems
Often you have to worry about endogeneity
of the key explanatory variable
Endogeneity could arise from omitted
variables that are not observed in the data
Endogeneity could arise because the model
is really part of a simultaneous equation
Endogeneity could arise due to
measurement error
Economics 20 - Prof,Anderson 9
Other Problems (continued)
If you have panel data,can consider a fixed
effects model (or first differences)
Problem with FE is that need good
variation over time
Can instead try to find a perfect instrument
and perform 2SLS
Problem with IV is finding a good
instrument
Economics 20 - Prof,Anderson 10
Interpreting Your Results
Keep theory in mind when interpreting
results
Be careful to keep ceteris paribus in mind
Keep in mind potential problems with your
estimates – be cautious drawing conclusions
Can get an idea of the direction of bias due
to omitted variables,measurement error or
simultaneity
Economics 20 - Prof,Anderson 11
Further Issues
Some problems are just too hard to easily
solve with available data
May be able to approach the problem in
several ways,but something wrong with
each one
Provide enough information for a reader to
decide whether they find your results
convincing or not
Economics 20 - Prof,Anderson 12
Further Issues (continued)
Don’t worry if you don’t,prove” your
theory
With unexpected results,you want to be
careful in thinking through potential biases
But,ff you have carefully specified your
model and feel confident you have unbiased
estimates,then that’s just the way things are
Summary and Conclusions
Carrying Out an Empirical Project
Economics 20 - Prof,Anderson 2
Choosing a Topic
Start with a general area or set of questions
Make sure you are interested in the topic
Use on-line services such as EconLit to
investigate past work on this topic
Narrow down your topic to a specific
question or issue to be investigated
Work through the theoretical issue
Economics 20 - Prof,Anderson 3
Choosing Data
Want data that includes measures of the
things that your theoretical model imply are
important
Investigate what type of data sets have been
used in the past literature
Search for what other data sets are
available (for example,ICPSR)
Consider collecting your own data
Economics 20 - Prof,Anderson 4
Using the Data
Create variables appropriate for analysis
For example,create dummy variables from
categorical variables,create hourly wages,
etc,
Check the data for missing values,errors,
outliers,etc,
Recode as necessary,be sure to report what
you did
Economics 20 - Prof,Anderson 5
Estimating a Model
Start with a model that is clearly based in
theory
Test for significance of other variables that
are theoretically less clear
Test for functional form misspecification
Consider reasonable interactions,
quadratics,logs,etc,
Economics 20 - Prof,Anderson 6
Estimating a Model (continued)
Don’t lose sight of theory and the ceteris
paribus interpretation – you need to be
careful about including variables that
greatly alter the interpretation
For example,effect of bedrooms
conditional on square footage
Be careful about putting functions of y on
the right hand side – affects interpretation
Economics 20 - Prof,Anderson 7
Estimating a Model (continued)
Once you have a well-specified model,
need to worry about the standard errors
Test for heteroskedasticity
Correct if necessary
Test for serial correlation if there is a time
component
Correct if necessary
Economics 20 - Prof,Anderson 8
Other Problems
Often you have to worry about endogeneity
of the key explanatory variable
Endogeneity could arise from omitted
variables that are not observed in the data
Endogeneity could arise because the model
is really part of a simultaneous equation
Endogeneity could arise due to
measurement error
Economics 20 - Prof,Anderson 9
Other Problems (continued)
If you have panel data,can consider a fixed
effects model (or first differences)
Problem with FE is that need good
variation over time
Can instead try to find a perfect instrument
and perform 2SLS
Problem with IV is finding a good
instrument
Economics 20 - Prof,Anderson 10
Interpreting Your Results
Keep theory in mind when interpreting
results
Be careful to keep ceteris paribus in mind
Keep in mind potential problems with your
estimates – be cautious drawing conclusions
Can get an idea of the direction of bias due
to omitted variables,measurement error or
simultaneity
Economics 20 - Prof,Anderson 11
Further Issues
Some problems are just too hard to easily
solve with available data
May be able to approach the problem in
several ways,but something wrong with
each one
Provide enough information for a reader to
decide whether they find your results
convincing or not
Economics 20 - Prof,Anderson 12
Further Issues (continued)
Don’t worry if you don’t,prove” your
theory
With unexpected results,you want to be
careful in thinking through potential biases
But,ff you have carefully specified your
model and feel confident you have unbiased
estimates,then that’s just the way things are
