Ekonometrika fani bilan tanishuv

Steps in Empirical Economic Analysis

(cont’d)

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Step 3:
Turn it into an econometric model.

• 
  solve quantification issues
  
  • 
    how can we measure hours spent in criminal activity?
    
  • 
    how do we approximate the probability of being caught with an
    observable economic variable?
    
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  specify the functional form of the economic relationships
  
  • 
    example (crime vs. wage):
    crime = β0 + β1 wage + β1 oth_inc + β2 freq_arr + β3 freq_conv
    
    + β4 avg_sen + β5 age + u
    
    • 
      u ... error term or disturbance, which contains:
      
      • 
        unobserved factors (“criminal wage”, moral character, family background)
        
      • 
        measurement errors
        
      • 
        random nature of human behaviour
        

The Structure of Econometric Data

Cross-sectional data. Time series.

Pooled cross sections and panel data.


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Cross-Sectional Data

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• 
  1 observation = information about 1 cross-sectional unit
  
  • 
    cross-sectional units: individuals, households, firms, cities, states
    
• 
  data taken at a given point in time
  
• 
  typical assumption: units form a random sample from the whole population → the notion of independence of the units’ values
  
  • 
    possible violations:
    
    • 
      censoring: wealthier families are less likely to disclose their wealth
      
    • 
      small population: neighboring states influence one another, their indicators are not independent