3. (40 points)In 1990, Whittington, et al published a study on the effect of tax

Question

3. (40 points)In 1990, Whittington, et al published a study on the effect of tax ex- emptions on the general rate of fertility (births per 1000 women). The original article can be found on Carmen under the papers section. The general form of their estimating equation is: GFR,-0 + A Personal Exmption + 2Income+ 3Unemployment + 41nfantMortality + 5Immigration + 6Femalew age + GBirthControl + ß8WWII +39Timetrend+ . They try multiple estimation techniques based on this equation, but vary the number of lags of each indepen- dent variable. For example, in their preferred estimation they include times t, t-1, t-2, t-3, and t-4 of each independent variable. (a) Why would Female wage be included in the regression? (Think principles of microeconomicS (b) Why should lags be included? c) Why should a time trend be included? (d) The authors state that coefficients on individual lags are not necessarily reli- able, but the sum of those coefficients is reliable. Why would the individual lag coefficients be unreliable?

Explanation / Answer

1) If female wage is higher the opportunity cost i.e. the cost of sacrificing work by taking maternity leave is higher, so it should be included in estimation of General fertility rate.

2) Lags should be included because effect of earning capacity i.e. income, affects this year's general fertility rate(GFR) as well as next year's GFR, similarly for other independent variables.

3) Time trend captures the variation in choices over time.

4) Beacause interaction among the independent variables affect the regression.

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