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#Lab 3 Instrumental variables Stat 209 2/15/18 (see also Rogosa R-session)
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##### Examples from Wooldridge, Introductory Econometrics
####### Chapters 15 and 16
## stata results available from
http://fmwww.bc.edu/gstat/examples/wooldridge/wooldridge15.html
http://fmwww.bc.edu/gstat/examples/wooldridge/wooldridge16.html
## The structure of Lab3 is that this file contains instructions and basic code
## for the Lab activities. The instructions, originally prepared by Karen Kapur
## in the initial year of the course, use the tsls function from the sem package
## which was the dominant method in past years. The later appearance of the AER
## package and the ivreg command has likely become the most popular now (with addon from
## Dylan Small's ivpack). Even more recent is the ivmodel package
## The Rogosa R-session carries out the lab activities using both ivreg and tsls
## The Rogosa R-session contains output, further discussion
## and some extensions. Should also add new ivmodel
## package capabilities but there's already plenty here
#*********************************************
# Task 0: Get the data
#*********************************************
mroz87 = read.table( "http://www-stat.stanford.edu/~rag/stat209/Mroz87.dat", header = T)
names( mroz87)
# lfp Dummy variable for labor-force participation.
# hours Wife's hours of work in 1975.
# kids5 Number of children 5 years old or younger.
# kids618 Number of children 6 to 18 years old.
# age Wife's age.
# educ Wife's educational attainment, in years.
# wage Wife's average hourly earnings, in 1975 dollars.
# repwage Wife's wage reported at the time of the 1976 interview.
# hushrs Husband's hours worked in 1975.
# husage Husband's age.
# huseduc Husband's educational attainment, in years.
# huswage Husband's wage, in 1975 dollars.
# faminc Family income, in 1975 dollars.
# mtr Marginal tax rate facing the wife.
# motheduc Wife's mother's educational attainment, in years.
# fatheduc Wife's father's educational attainment, in years.
# unem Unemployment rate in county of residence, in percentage points.
# city Dummy variable = 1 if live in large city, else 0.
# exper Actual years of wife's previous labor market experience.
# nwifeinc Non-wife income.
# wifecoll Dummy variable for wife's college attendance.
# huscoll Dummy variable for husband's college attendance.
#*********************************************
# Task1: Single instrument example
#*********************************************
###
# 1. Load the sem library (or alternatively use AER ivreg, see end of Rogosa R-session)
###
library(sem)
###
# 2. Read help files for tsls function
###
help(tsls)
###
# 3. Model log wage as a linear function of
# education
###
# Take a subset of the data with wage > 0
posWage = subset( mroz87, wage > 0 )
posWage$logWage = log( posWage$wage )
summary( posWage$logWage )
# Fit a linear model (using OLS)
lm.posWage = lm( logWage ~ educ, data = posWage )
summary( lm.posWage )
###
# 4. Use fatheduc as an instrumental variable
###
# Suppose we suspect that an unobserved variable such as ability should be included in the model
# If we also believe that education and ability are correlated, then we can use
# the method of instrumental variables to get a consistent estimate of the educ coefficient.
#{note: Rogosa session also uses ivreg from AER in addition to tsls from sem}
# fatheduc as an instrumental variable
# First check that educ and fatheduc are correlated. (ivreg does this in diagnostics)
lm.educ = lm( educ ~ fatheduc, data = posWage )
summary( lm.educ )
# The t-statistic shows that educ and fatheduc are correlated. [cf. AER ivreg "weak instruments" test]
###
# 5. Fit the instrumental variable model
###
instr.posWage = tsls( logWage ~ educ, instruments =~ fatheduc, data = posWage )
# regression formula: logWage ~ educ
# specify instruments: instruments=~ fatheduc
# specify the data frame: data = posWage
summary( instr.posWage )
###
# 6. Notice the difference in coefficient estimates and
# also the difference in standard errors
###
summary( lm.posWage )
summary( instr.posWage )
# note: the Hausman test is often used to show there's a difference between OLS and IV, but what does that tell you?
# see ivreg diagnostics
###
# 7. Check that the instrumental variable coefficient estimates
# can be calculated as follows (from week 6 class handout)
###
# slope
slope = cov(posWage$logWage,posWage$fatheduc)/cov(posWage$educ,posWage$fatheduc)
slope
# intercept
ivint = mean(posWage$logWage) - slope*mean(posWage$educ)
ivint
###
# 8. Two-stage least squares estimates can be computed
# using two calls to lm.
###
lm.1 = lm( educ ~ fatheduc, data = posWage )
lm.2 = lm( logWage ~ lm.1$fitted, data = posWage )
summary( lm.2 )
#*********************************************
# Task2: Multiple instruments
#*********************************************
###
# 1. Model logWage as a linear function of educ, exper and exper^2
###
# Create a variable for exper^2 and add it to the posWage data frame
posWage$exper2 = posWage$exper^2
lm.posWage.2 = lm( logWage ~ educ + exper + exper2, data = posWage)
summary( lm.posWage.2 )
###
# 2. Use motheduc, fatheduc as instruments, assuming exper and exper^2 are exogenous variables
###
# First check that educ is correlated with motheduc and fatheduc
lm.educ.2 = lm( educ ~ fatheduc + motheduc, data = posWage )
summary( lm.educ.2 )
lm.educ.3 = update( lm.educ.2, .~. -fatheduc - motheduc, data = posWage )
anova( lm.educ.3, lm.educ.2 )
# The F test shows that fatheduc and motheduc are correlated with educ.
# Now fit the multiple instruments model
instr.posWage2 = tsls( logWage ~ educ + exper + exper2, instruments =~ exper + exper2 + fatheduc + motheduc, data = posWage )
summary( instr.posWage2 )
#*********************************************
# Task3: Simultaneous equations
#*********************************************
# Labor supply of married working women.
# hours = alpha1*logWage + beta10 + beta11*educ + beta12*age + beta13*kids5 + beta14*nwifeinc + u1
# logWage = alpha2*hours + beta20 + beta21*educ + beta22*exper + beta23*exper^2 + u2
###
# 1. Assume all variables except hours and logWage are exogenous.
# Use educ, age, kids5, nwifeinc, exper and exper^2 as instruments, check indentifiability
###
# scan of Wooldridge p.562 at http://www-stat.stanford.edu/~rag/stat209/woolp562.pdf
# Instruments for each equation must have distinct members
# The first equation can be estimated provided beta22 and/or beta23 are non-zero.
lm.hours = lm( hours ~ educ + age + kids5 + nwifeinc + exper + exper2, data = posWage )
lm.hours2 = update( lm.hours, .~. -exper - exper2 )
anova( lm.hours2, lm.hours )
# The F-test is significant
# The second equation can be estimated provided beta12 and/or beta13 and/or beta14 are non-zero.
lm.logWage = lm( logWage ~ educ + exper + exper2 + educ + age + kids5 + nwifeinc, data = posWage )
lm.logWage2 = update( lm.logWage, .~. -educ - age - kids5 - nwifeinc )
anova( lm.logWage2, lm.logWage)
# The F-test is significant [note: Sargan test in ivreg diagnostics addresses the identifiability concerns]
###
# 2. Now fit the simultaneous modeling equations
###
sem.hours = tsls( hours ~ logWage + educ + age + kids5 + nwifeinc, instruments =~ educ + age + kids5 + nwifeinc + exper + exper2, data = posWage )
summary( sem.hours )
sem.logWage = tsls( logWage ~ hours + educ + exper + exper2, instruments =~ educ + exper + exper2 + age + kids5 + nwifeinc, data = posWage )
summary( sem.logWage )
################ End Lab 3 (Basic Instructions, legacy) 2018 Additional pieces in Rogosa R-session
#*********************************************
# For reference R does LISREL: RAM formulation of LISREL models
#*********************************************
# p.472-479
http://socserv.mcmaster.ca/jfox/Misc/sem/SEM-paper.pdf
#Stability of Alienation example, used by LISREL (Joreskog)
#and Proc CALIS (SAS) etc
# also Structural Equation Models Appendix to
# An R and S-PLUS Companion to Applied Regression
John Fox January 2002
https://socialsciences.mcmaster.ca/jfox/Books/Companion/appendix/Appendix-SEMs.pdf
Additional references and front-end tools linked in Week 6 resources,
a number of recent projects
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