Amherst College Department of Economics Economics 360 Fall 2015 Wednesday, October 28 Problem Set Solutions

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1 Amherst College Department of Economics Economics 360 Fall 015 Wednesday, October 8 Problem Set Solutions 1. What is a Congressional earmark? Earmarks are funds provided by the Congress for projects, programs, or grants where the purported congressional direction (whether in statutory text, report language, or other communication) circumvents otherwise applicable merit-based or competitive allocation processes, or specifies the location or recipient, or otherwise curtails the ability of the executive branch to manage its statutory and constitutional responsibilities pertaining to the funds allocation process Source: Office of Management and Budget. Consider the following earmark data: House Earmark Data: Cross section data of proposed earmarks in the 009 fiscal year for the 451 House members of the 110 th Congress. CongressName t Name of Congressperson t CongressParty t Party of Congressperson t CongressState t State of Congressperson t Income per capita in Congressperson t s state (Dollars) Number of earmarks received that were sponsored solely by Congressperson t PartyDem t 1 if Congressperson t Democrat, 0 otherwise LiberalScore t Congressperson s t liberal score rating in 007 UnemRate t Unemployment rate in Congressperson t s state YearsInHouse Number of terms served by Congressperson t in the U. S. Congress Focus on the following model: + e t a. Develop a theory that explains how each explanatory variable affects the number of solo earmarks. What do your theories suggest about the sign of each coefficient? The seniority system provides long time members of Congress more influence than newly elected members; hence additional years should increase the number of solo earmarks. Years Equity suggests that low income states should receive more Federal government assistance than high income states; hence, high income states should receive fewer earmarks. IncPC < 0.

2 b. Use the ordinary least squares (OLS) estimation procedure to estimate the coefficients. Interpret the coefficient estimates. Included observations: 436 YEARSINHOUSE INCPC C Estimated Equation: Earmarks = YearsInHouse.00IncPC Interpreting the Coefficient Estimates b Years =.7 We estimate that an additional term in Congress increases a member s solo earmarks by.7. b IncPC =.00 We estimate that a 1 thousand dollar increase in a state s per capita income reduces a member earmarks by.00. c. Formulate the null and alternative hypotheses. Seniority Equity : Years : IncPC : Years > 0 : IncPC < 0 d. Calculate Prob[Results IF True] and assess your theory. Seniority.0000 <.0001 Equity We do reject the seniority null hypothesis at the traditional significance levels. We do not reject the equity null hypothesis at the traditional significance levels.

3 3 3. Begin with the model introduced in problem : + e t Focus on the following allegation: Allegation: Democrats receive more earmarks than their Republican colleagues. a. What type of variable should you introduce into the model to assess this allegation? Dummy variable b. What variable included in the House Earmarks workfile is the correct one? PartyDem1 c. Add the new variable to the model introduced in problem. + PartyDem PartyDem1 t + e t d. What does the allegation suggest about the sign of the new variable s coefficient? PartyDem e. Formulate the null and alternative hypotheses regarding the allegation. : PartyDem : PartyDem > 0 f. Use the ordinary least squares (OLS) estimation procedure to estimate the parameters of the model. Interpret the new variable s coefficient estimate. What do you conclude about the allegation? Included observations: 436 YEARSINHOUSE INCPC PARTYDEM C Estimated Equation: Earmarks = YearsInHouse.08IncPC +.38PartyDem1 Interpreting the PartyDem coefficient estimate: PartyDem =.38. We estimate that being a Democrat increases solo earmarks by.38. The sign of the coefficient estimate supports the allegation. Based on the Prob column we do reject the null hypothesis at the traditional tradition levels. Conequently, we conclude that the allegation is supported.

4 4 4. Begin with the model you devised in problem 3 (not problem ). Focus on the following allegation: Allegation: Liberal Democrats receive more earmarks than their their less liberal Democratic colleagues. a. What type of variable should you introduce into the model to assess this allegation? Interaction variable b. Consider variables included in the House Earmarks workfile. Generate a new variable from the existing ones so that you can assess the allegation. Lib_Dem = PartyDem1*LiberalScore. c. Add the new variable to the model introduced in problem. + PartyDem PartyDem t + LibDem Lib_Dem t + e t d. What does the allegation suggest about the sign of the new variable s coefficient? LibDem e. Formulate the null and alternative hypotheses regarding the allegation. : LibDem : LibDem > 0 f. Use the ordinary least squares (OLS) estimation procedure to estimate the parameters of the model. Interpret the new variable s coefficient estimate. What do you conclude about the allegation? Included observations: 434 YEARSINHOUSE INCPC PARTYDEM LIB_DEM C Estimated Equation: Earmarks = YearsInHouse.091IncPC +.09PartyDem t +.007Lib_Dem Interpreting the liberal Democrat coefficient estimate: LibDem 07. We estimate that being a liberal Democrat increases solo earmarks by.007. The sign of the coefficient estimate supports the allegation. Based on the Prob column, we would not reject the null hypothesis at all the traditional significance levels. Consequently, we conclude that the allegation is not supported.

5 5 5. (Prep Problem) The following are excerpts from an article appearing in the New York Times on September 1, 008: Doubt Grow Over Flu Vaccine in Elderly by Brenda Goodman The influenza vaccine, which has been strongly recommended for people over 65 for more than four decades, is losing its reputation as an effective way to ward off the virus in the elderly. A growing number of immunologists and epidemiologists say the vaccine probably does not work very well for people over 70 The latest blow was a study in The Lancet last month that called into question much of the statistical evidence for the vaccine s effectiveness. The study found that people who were healthy and conscientious about staying well were the most likely to get an annual flu shot. [others] are less likely to get to their doctor s office or a clinic to receive the vaccine. Dr. David K. Shay of the Centers for Disease Control and Prevention, a co-author of a commentary that accompanied Dr. Jackson s study, agreed that these measures of health were not incorporated into early estimations of the vaccine s effectiveness and could well have skewed the findings. a. Intuitively, does being healthy and conscientious about staying well increase or decrease the chances of getting flu? Decrease. Similarly, does being healthy and conscientious about staying well increase or decrease the severity of the flu if an individual does get it? Decrease. b. According to the article, are those who are healthy and conscientious about staying well more or less likely to get a flu shot? More likely. c. The article alleges that previous studies did not incorporate health and conscientious in judging the effectiveness of flu shots. If the allegation is true, have previous studies overestimated or underestimated the effectiveness of flu shots? Overestimated. d. Suppose that you were the director of your community s health department. You are considering whether or not to subsidize flu vaccines for the elderly. Would you find the previous studies useful? That is, would a study that did not incorporate health and conscientious in judging the effectiveness of flu shots help you decide if your department should spend your limited budget to subsidize flu vaccines? Explain. No. As the director of the health department, you need to separate the effect of the vaccine itself from the effect of healthy and conscientious about staying well.