Gary Solon

Fall 2012
ECONOMICS 823: APPLIED ECONOMETRICS
The purpose of this course is to discuss some econometric models and methods likely to
be useful in dissertation (and subsequent) research. An essential prerequisite for this course is to
have taken Economics 820b or an equivalent Ph.D.-level introduction to econometrics. The
graded course work will include a midterm examination in class on October 10 (accounting for
35% of the course grade), a final exam on December 11 at 3:00-5:00 (55%), and a series of
homework exercises (10%).
Students in Economics 823 are urged to participate in the weekly empirical
microeconomics research seminar, which usually will meet at 1:30-3:00 on Fridays. The
schedule is available at http://econ.msu.edu/seminars/applied_economics.php. In some weeks,
we may devote class time in Economics 823 to discussing the seminar paper.
The syllabus below lists the course topics and accompanying readings. The main
textbook is Jeffrey M. Wooldridge, Econometric Analysis of Cross Section and Panel Data, 2nd
ed., 2010. The syllabus also lists some readings from two other econometrics textbooks: William
H. Greene, Econometric Analysis, 7th edition, 2012 (which most students should have from
Economics 820b) and the surprisingly entertaining (and inexpensive) book by Joshua D. Angrist
and Jrn-Steffen Pischke, Mostly Harmless Econometrics: An Empiricists Companion, 2009. In
addition, the syllabus includes readings from journal articles, many of which illustrate the
application of the models and methods discussed in this course.
I. REVIEW OF LINEAR SINGLE-EQUATION REGRESSION MODELS
A. Exogenous regressors
Wooldridge (4.1, 4.2).
Greene (2-6, 9, 20).
Angrist and Pischke (1, 2, 3.1, 3.2.1).
B. Endogenous regressors
Wooldridge (4.1, 4.3, 4.4, 5).
Greene (4.3.2, 8.1-8.5).
Angrist and Pischke (3.2.2, 3.2.3, 4.1).
II. LINEAR SIMULTANEOUS EQUATIONS MODELS
A. Single-equation instrumental variables estimation
Wooldridge (5, 6.3.1, 6.3.2).
Greene (10.6.1-10.6.4).
Angrist and Pischke (4.2, 4.6.1).

Joshua D. Angrist, Kathryn Graddy, and Guido W. Imbens, The Interpretation of

Instrumental Variables Estimators in Simultaneous Equations Models with an
Application to the Demand for Fish, Review of Economic Studies, July 2000, pp. 499527.
B. Pitfalls
Wooldridge (5.2.6, 21.5).
Angrist and Pischke (4.6.4).
Joshua D. Angrist and Alan B. Krueger, Does Compulsory School Attendance Affect
Schooling and Earnings? Quarterly Journal of Economics, November 1991, pp. 9791014.
John Bound, David A. Jaeger, and Regina M. Baker, Problems with Instrumental
Variables Estimation When the Correlation between the Instruments and the Endogenous
Explanatory Variable Is Weak, Journal of the American Statistical Association, June
1995, pp. 443-50.
Todd E. Elder, The Importance of Relative Standards in ADHD Diagnoses: Evidence
Based on Exact Birth Dates, Journal of Health Economics, September 2010, pp. 641-56.
C. System estimation
Greene (10.6.5).
III. NONLINEAR MODELS FOR DISCRETE AND FRACTIONAL DEPENDENT
VARIABLES
A. Binary and fractional variables
Wooldridge (15.1-15.5, 18.6.1).
Orley C. Ashenfelter and David E. Bloom, Models of Arbitrator Behavior: Theory and
Evidence, American Economic Review, March 1984, pp. 111-24.
B. Multinomial variables
Wooldridge (16).
Theodore C. Bergstrom, Daniel L. Rubinfeld, and Perry Shapiro, Micro-Based
Estimates of Demand Functions for Local School Expenditures, Econometrica,
September 1982, pp. 1183-1205.
C. Count variables
Wooldridge (18.1-18.3).
Nancy L. Rose, Profitability and Product Quality: Economic Determinants of Airline
Safety Performance, Journal of Political Economy, October 1990, pp. 944-64.

IV. ENDOGENOUS SWITCHING REGRESSIONS MODELS

A. General analysis
Takeshi Amemiya, Tobit Models: A Survey, Journal of Econometrics,
January/February 1984, Sections 1-4, 7, 10-11.
Robert J. Willis and Sherwin Rosen, Education and Self-Selection, Journal of Political
Economy, October 1979, pp. S7-36.
B. Some special cases
1. Binary dependent variables revisited
2. Limited dependent variables
Wooldridge (17.1-17.4).
Angrist and Pischke (3.4.2).
Amemiya, Tobit Models, Sections 2-3.
Gary Solon, A Simple Microeconomic Foundation for a Tobit Model of
Consumer Demand, Economics Letters, February 2010, pp. 131-2.
James J. Heckman, Shadow Prices, Market Wages, and Labor Supply,
Econometrica, July 1974, pp. 679-94.
3. Duration models
Wooldridge (22).
Tony Lancaster, Econometric Methods for the Duration of Unemployment,
Econometrica, July 1979, pp. 939-56.
Gary Solon, Work Incentive Effects of Taxing Unemployment Benefits,
Econometrica, March 1985, pp. 295-306.
4. Censored samples
Wooldridge (19.1-19.8).
Amemiya, Tobit Models, Sections 8-9.
James J. Heckman, Sample Selection Bias as a Specification Error,
Econometrica, January 1979, pp. 153-61.
5. Endogenous binary regressors
Wooldridge (21.1-21.4).
Angrist and Pischke (4.4, 4.5).

James J. Heckman, Dummy Endogenous Variables in a Simultaneous Equations

System, Econometrica, July 1978, pp. 931-59.
V. ANALYSIS OF LONGITUDINAL AND OTHER DATA WITH GROUP STRUCTURE
A. Linear fixed effects models
Wooldridge (10.1, 10.5, 10.6, 10.7.1).
Angrist and Pischke (5.1, 5.2).
Philip J. Cook and George Tauchen, The Effect of Minimum Drinking Age Legislation
on Youthful Auto Fatalities, 1970-77, Journal of Legal Studies, January 1984, pp. 16990.
Arline T. Geronimus and Sanders Korenman, The Socioeconomic Consequences of
Teen Childbearing Reconsidered, Quarterly Journal of Economics, November 1992,
pp. 1187-1214.
Atsushi Inoue and Gary Solon, A Portmanteau Test for Serially Correlated Errors in
Fixed Effects Models, Econometric Theory, October 2006, pp. 835-51.
Justin Wolfers, Did Unilateral Divorce Laws Raise Divorce Rates? A Reconciliation
and New Results, American Economic Review, December 2006, pp. 1802-20.
Patrick Kline, The Impact of Juvenile Curfew Laws, 2010, available at
http://emlab.berkeley.edu/~pkline/papers/Youth%20curfews%20latest.pdf.
B. Linear random effects models and clustering
Wooldridge (10.2-10.4, 10.7.2, 10.7.3, 20.3).
Angrist and Pischke (8).
John Yinger, Measuring Racial Discrimination with Fair Housing Audits: Caught in the
Act, American Economic Review, December 1986, pp. 881-93.
Brent R. Moulton, Random Group Effects and the Precision of Regression Estimates,
Journal of Econometrics, August 1986, pp. 385-97.
Jeffrey M. Wooldridge, Cluster-Sample Methods in Applied Econometrics, American
Economic Review, May 2003, pp. 133-38.
Stephen G. Donald and Kevin Lang, Inference with Difference-in-Differences and
Other Panel Data, Review of Economics and Statistics, May 2007, pp. 221-33.
David Card and Alan B. Krueger, Minimum Wages and Employment: A Case Study of
the Fast-Food Industry in New Jersey and Pennsylvania, American Economic Review,
September 1994, pp. 772-93.
Gary Solon, Steven J. Haider, and Jeffrey M. Wooldridge, What Are We Weighting
For? 2012.

C. Sources of identifying variation and aggregation issues

John Bound and Gary Solon, Double Trouble: On the Value of Twins-Based Estimation
of the Return to Schooling, Economics of Education Review, April 1999, pp. 169-82.
Robert Gibbons and Lawrence Katz, Does Unmeasured Ability Explain Inter-Industry
Wage Differentials? Review of Economic Studies, July 1992, pp. 515-35.
Matthew J. Cushing and Mary G. McGarvey, Identification by Disaggregation,
American Economic Review, December 1985, pp. 1165-67.
D. Discrete and limited dependent variables
Wooldridge (15.8, 18.7, 17.8).
Gary Chamberlain, Analysis of Covariance with Qualitative Data, Review of Economic
Studies, January 1980, pp. 225-38.
Jerry Hausman, Bronwyn H. Hall, and Zvi Griliches, Econometric Models for Count
Data with an Application to the Patents - R & D Relationship, Econometrica, July 1984,
pp. 909-38.
Marianne Page, Racial and Ethnic Discrimination in Urban Housing Markets: Evidence
from a Recent Audit Study, Journal of Urban Economics, September 1995, pp. 183206.
George Jakubson, The Sensitivity of Labor-Supply Parameter Estimates to Unobserved
Individual Effects: Fixed- and Random-Effects Estimates in a Nonlinear Model Using
Panel Data, Journal of Labor Economics, July 1988, pp. 302-29.