Marno Verbeek, “A Guide to Modern Econometrics” – Exercise

7.1

Show transcribed image text For a sample of 600 married females, we are interested in explaining participation in market employment from exogenous characteristics in x, (age, family composition, education). Let y-1 if person i has a paid job and 0 otherwise. Suppose we estimate a linear regression model by ordinary least squares. a. Give two reasons why this is not really an appropriate model. As an alternative, we could model the participation decision by a probit model. b. c. d. Explain the probit model. Give an expression for the loglikelihood function of the probit model. How would you interpret a positive Î² coefficient for education in the probit model? Suppose you have a person with x(B = 2. What is your prediction for her labour market status y;? Why? f. To what extent is a logit model different from a probit model?

For a sample of 600 married females, we are interested in explaining participation in market employment from exogenous characteristics in x, (age, family composition, education). Let y-1 if person i has a paid job and 0 otherwise. Suppose we estimate a linear regression model by ordinary least squares. a. Give two reasons why this is not really an appropriate model. As an alternative, we could model the participation decision by a probit model. b. c. d. Explain the probit model. Give an expression for the loglikelihood function of the probit model. How would you interpret a positive Î² coefficient for education in the probit model? Suppose you have a person with x(B = 2. What is your prediction for her labour market status y;? Why? f. To what extent is a logit model different from a probit model?