(a) Run an OLS regression of logarithm wage (lwage) on years of schooling (educ), i.e.,
lwagei = α + βeduci + ui.
Use a sentence to interpret βˆOLS.
(b) Use ivreg command to run a Two Stage Least Squares (2SLS) regression. Use father’s years of
schooling (fatheduc) as the instrument variable. Use a sentence to interpret βˆ
(c) Check the F-statistics from the first-stage regression. How large it is? Is the instrument variable
(d) Perform a Hausman’s test to compare OLS with 2SLS estimators. Write down your test hypoth-
esis, p-value and conclusion.
(e) Discuss if father’s years of schooling (fatheduc) is a solid instrument variable, i.e., satisfies con-
ditions of instrument variables.
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