Review the following study sources and respond to the following questions illustrated below:
1) Worms: Identifying Impacts on Education and Health in the Presence of Treatment Externalities By Edward Miguel and Michael Kremer
2) Does Trade cause Growth? By Jeffrey A. Frankel and David Romer published by The American Economic Review, Vol. 89, No. 3 (Jun., 1999), 379-399
3) Household Response to Income Changes: Evidence from an Unconditional Cash Transfer Program in Kenya By Johannes Haushofer and Jeremy Shapiro
Question 1: This question is based on “Does Trade Cause Growth?” by Frankel and Romer (1999).
a) Explain in no more than a few sentences how the authors construct an instrumental variable to test for the causal effect of trade openness on economic development.
b) Interpret the regression coefficients of columns 1 and 2 in Table 3 of the paper, and comment on their statistical significance.
c) List the assumptions that need to hold for a causal interpretation of the point estimates on trade openness in column 2 of Table 3.
d) List your two main concerns that you think could pose a challenge to the validity of these assumptions.
e) Suggest one way in which the authors could try to address each of your two concerns (two suggestions). Think of this as two additional robustness checks that the authors could estimate and report in their analysis to check if your concerns are relevant.
f) Given your answer to d), how would you expect the point estimates of the effect of trade openness to differ between columns 1 and 2 of Table 3? If this is not what the authors find, then what could be an explanation for the difference we observe in the table?
Question 2:
a) Explain in no more than a few sentences how Haushofer and Shapiro (2013) estimate the spillover effect of unconditional cash transfers on households who did not receive the transfer.
b) In no more than a few sentences, explain how Haushofer and Shapiro (2013) could, in addition, also use the methodology proposed in Miguel and Kremer (2004, “Worms”) to estimate one additional type of spillover on the control group [hint: think of schools in Kremer and Miguel as villages in the setting of Haushofer and Shapiro]. Conceptually, how would this spillover be different from the spillover they currently estimate as you describe in part a)?
Question 3:
This questions asks you to estimate the causal effect of tourism on local household incomes in Mexico. To answer this question, we will use Stata and the dataset “Mexico_PS2.dta” that you can download from BCourses. This dataset contains 1153 Mexican municipalities that reported some amount of local tourism activity (measured by local hotel sales) in the year 2000. Write up the answers to a)-e) below in the same document you used for Questions 1 and 2 above. In addition, also attach the do file that you used to answer the following questions.
a) Open the dataset in Stata. Visualize and export a table that lists the number of observations, the mean, the standard deviation, the minimum value and the maximum value for each of the variables in the dataset (edit and include the table in your written up answer). Briefly describe what we learn from the table about the sample of Mexican municipalities.
b) Use the data to obtain an OLS point estimate of the effect of local tourism activity (measured by the logarithm of local hotel sales) on the logarithm of local average monthly household incomes. Export your result in a regression table (that you can edit and include in your written up answer), and comment on the interpretation and statistical significance of your result.
c) List three plausible arguments why the point estimate in b) could be biased upwards or downwards relative to the true causal effect of local tourism activity on monthly household incomes.
d) Now your GSI suggests that the kilometer distance between the center of the municipality and the nearest segment of the US-Mexico border could be a valid instrumental variable for your measure of local tourism activity. List the assumptions that need to hold true for this to be correct.
e) Verify if the assumption of instrument relevance is satisfied, and export the results into the same regression table that you used before. Comment on the interpretation and statistical significance of your result.
f) Now use Stata to estimate the 2nd stage IV point estimate as suggested by the GSI, and export your result in the same regression table you used before. Comment on the interpretation and statistical significance of your result. In reference to your answer to c), is the difference between the OLS and IV point estimates as you expected or rather not?
g) Now one of your friends suggests that the distance to the US border is likely correlated with other local characteristics that affect local incomes, such as the logarithm of the average temperature, the logarithm of the average precipitation, the average years of education and the proportion of indigenous population. Propose a way to verify whether these concerns are relevant and export your regression results in the same table as before. Comment on the results and what they imply about the validity of the instrumental variable strategy.