# Economics Research Worksheet

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Problem Set 8
EC 15 Introduction to Econometrics
Spring 2022
Problem 1 (Difference in Differences)
In this problem, you will replicate one of the results in Card and Krueger (1994). Read this article
(a) What is the research question?
(b) What is the treatment, the treated group, and the control group, here?
(c) By using cardkrueger1994.dta (see the Table 1 below for the variable descriptions),
Table 1: Variable Description
Variable
Description
fte
state
time
full-time equivalent employment
A dummy variable which takes 1 for NJ and 0 for PA
A dummy variable which takes 0 if first survey (2/15/1992  3/4/1992)
1 if second survey (11/5/1992  12/31/1992)
A unique store ID
store
Fill out the Table 2 below. You can use summarize to fill this table out. OR you can install
diff by typing ssc install diff and use diff yvar, t(treatment) p(time)
Table 2: Full-time Equivalent Employment (FTE)
Control
Treatment
Treatment-Control
Before
After
After-Before
(d) Write the difference-in-differences regression equation you would use to answer the research
question. Describe the expected effects of the coefficients on treat, after and treat x after.
(e) Estimate your difference in differences equation and interpret the results. Display your regression
result using outreg command. Display your estimates and standard errors up to the two decimal
points.
(f) What is the key assumption to interpret this result as causal?
1
2
Problem 2 (Instrumental Variables)
In Problem Set 5, you read some parts of Acemoglu, Johnson, and Robinson (2001) and examined
possible issues with the simple OLS regression. Now read ALL sections of Acemoglu, Johnson, and
Robinson (2001). In this problem, you will replicate the first column of Panel A, B, and C of their
Table 4 using an instrumental variables (two-stage least squares, or 2SLS) approach. Download the
dataset institution.dta and answer the following questions.
Table 3: Variable Description
Variable
Description
loggdp
protection
setmort
log PPP GDP per capita in 1995, World Bank
average protection against expropriation risk
log settler mortality
(a) Write the na?ive regression for estimating the effect of having better institutions measured as the
average protection against expropriation risk (protection) on the economy (loggdp).
(b) What must be true for the mortality rate (setmort) to be a valid instrument?
(c) Write the reduced-form equation to estimate the effect of the average protection against expropriation risk on log GDP per capita. (Recall: the reduced-form equation estimates the
effect of the instrument on the outcome.)
(d) In STATA, estimate the na?ive regression and the reduced-form regression. Display your regression results using outreg command. Display your estimates and standard errors up to the two
decimal points.
(e) In a sentence, interpret the effect of having higher mortality rate on per-capita GDP from the
reduced-form equation you estimated in part (d).
(f) Write out the regression corresponding to the first stage.
(g) Write out the regression corresponding to the second stage.
(h) In STATA, estimate the 2SLS IV regression. You can use ivreg yvar (xvar=ivvar), first.
Display your regression result using outreg command. Display your estimates and standard
errors up to the two decimal points.
(i) Does the first or second stage tell you how strongly the instrument is correlated with the endogenous variable?
(j) How do your conclusions about the effect of having better institutions on output in the na?ive
regression and the IV context compare? Which is bigger?
(k) Show how you can derive the 2SLS IV coefficient estimate using the reduced form and first-stage
coefficients. Make sure you can derive your IV estimate from part (g) with your reduced form
estimates from (c) and the first stage of (f).
References
Acemoglu, Daron, Simon Johnson, and James A Robinson. 2001. The colonial origins of comparative
development: An empirical investigation. American economic review 91 (5):13691401.
3
Card, David and Alan B Krueger. 1994. Minimum Wages and Employment: A Case Study of the
Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review 80 (4):772793.
American Economic Association
The Colonial Origins of Comparative Development: An Empirical Investigation
Author(s): Daron Acemoglu, Simon Johnson, James A. Robinson
Source: The American Economic Review, Vol. 91, No. 5 (Dec., 2001), pp. 1369-1401
Stable URL: http://www.jstor.org/stable/2677930
Accessed: 21/05/2009 16:59
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http://www.jstor.org
The Colonial Originsof Comparative Development:
An EmpiricalInvestigation
By DARON ACEMOGLU,SIMON JOHNSON,AND JAMESA. ROBINSON*
We exploit differences in European mortalityrates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization
policies in differentcolonies, with differentassociated institutions.In places where
Europeansfaced high mortalityrates, they could not settle and were more likely to
set up extractive institutions.These institutionspersisted to the present. Exploiting
differencesin Europeanmortalityrates as an instrumentfor currentinstitutions,we
estimate large effects of institutions on income per capita. Once the effect of
institutionsis controlledfor, countriesin Africa or those closer to the equatordo not
have lower incomes. (JEL 011, P16, P51)
What are the fundamental causes of the
large differences in income per capita across
countries? Although there is still little consensus on the answer to this question, differences in institutions and property rights have
years. Countries with better “institutions,”
more secure property rights, and less distor* Acemoglu: Department of Economics, E52-380b,
Massachusetts Institute of Technology, Cambridge, MA
(e-mail: daron@mit.edu);Johnson: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02319 (e-mail: sjohnson@mit.edu);Robinson:
Department of Political Science and Departmentof Economics, 210 BarrowsHall, University of California,Berkeley, CA 94720 (e-mail: jamesar@socrates.berkeley.edu).
We thank Joshua Angrist, Abhijit Banerjee, Esther Duflo,
Stan Engerman, John Gallup, Claudia Goldin, Robert
Hall, Chad Jones, Larry Katz, Richard Locke, Andrei
Shleifer, Ken Sokoloff, Judith Tendler, three anonymous
referees, and seminar participants at the University of
California-Berkeley, Brown University, Canadian Institute for Advanced Research, Columbia University, Harvard University, Massachusetts Institute of Technology,
National Bureau of Economic Research, Northwestern
University, New York University, Princeton University,
University of Rochester, Stanford University, Toulouse
University, University of California-Los Angeles, and the
World Bank for useful comments. We also thank Robert
McCaa for guiding us to the data on bishops’ mortality.
1369
tionary policies will invest more in physical
and human capital, and will use these factors
more efficiently to achieve a greater level of
income (e.g., Douglass C. North and Robert
P. Thomas, 1973; Eric L. Jones, 1981; North,
1981). This view receives some support from
cross-country correlations between measures
of property rights and economic development
(e.g., Stephen Knack and Philip Keefer, 1995;
Paulo Mauro, 1995; Robert E. Hall and
Charles I. Jones, 1999; Dani Rodrik, 1999),
and from a few micro studies that investigate
the relationship between property rights and
investment or output (e.g., Timothy Besley,
1995; ChristopherMazingo, 1999; Johnson et
al., 1999).
At some level it is obvious that institutions
matter. Witness, for example, the divergent
paths of North and South Korea, or East and
West Germany, where one part of the country
stagnated under central planning and collective ownership, while the other prospered
with private property and a market economy.
Nevertheless, we lack reliable estimates of
the effect of institutions on economic performance. It is quite likely that rich economies
choose or can afford better institutions. Perhaps more important, economies that are different for a variety of reasons will differ both
1370
THEAMERICANECONOMICREVIEW
in their institutions and in their income per
capita.
To estimatethe impactof institutionson economic performance,we need a source of exogenous variationin institutions.In this paper,we
propose a theory of institutional differences
among countriescolonized by Europeans,’ and
exploit this theoryto derive a possible source of
exogenous variation.Our theory rests on three
premises:
1. There were different types of colonization
policies which createddifferent sets of institutions.At one extreme,Europeanpowers set
up “extractivestates,”exemplifiedby the Belgian colonizationof the Congo. These institutions did not introducemuch protectionfor
privateproperty,nor did they providechecks
and balances against governmentexpropriation.In fact, the mainpurposeof the extractive
statewas to transferas much of the resources
of the colony to the colonizer.
At the other extreme, many Europeansmigrated and settled in a number of colonies,
creating what the historian Alfred Crosby
(1986) calls “Neo-Europes.”The settlerstried
to replicateEuropeaninstitutions,with strong
emphasis on private property and checks
againstgovernmentpower. Primaryexamples
of this include Australia,New Zealand,Canada, and the UnitedStates.
2. The colonization strategywas influencedby
the feasibility of settlements.In places where
the disease environmentwas not favorableto
Europeansettlement,the cards were stacked
against the creationof Neo-Europes,and the
formation of the extractive state was more
likely.
3. The colonial state and institutionspersisted
even after independence.
DECEMBER2001
current institutions in these countries.2 More
specifically, our theory can be schematically
summarizedas
(potential) settler
> settlements
mortality
early
institutions
current
institutions
current
performance.
Based on these three premises, we use the
mortality rates expected by the first European
settlers in the colonies as an instrument for
We use dataon the mortalityratesof soldiers,
bishops, and sailors stationedin the colonies between the seventeenthand nineteenthcenturies,
largelybased on the work of the historianPhilip
D. Curtin.These give a good indicationof the
well informedabout these mortalityrates at the
time, even though they did not know how to
controlthe diseases that caused these high mortalityrates.
Figure 1 plots the logarithm of GDP per
capita today against the logarithmof the settler
mortalityrates per thousandfor a sample of 75
countries(see below for datadetails). It shows a
strong negative relationship. Colonies where
Europeansfaced higher mortality rates are today substantiallypoorerthan colonies that were
healthy for Europeans. Our theory is that this
relationshipreflects the effect of settler mortality working throughthe institutionsbroughtby
Europeans.To substantiatethis, we regress current performance on current institutions, and
instrumentthe latter by settler mortality rates.
Since our focus is on propertyrights and checks
against governmentpower, we use the protection against “risk of expropriation”index from
Political Risk Services as a proxy for institutions. This variable measures differences in institutions originating from different types of
states and state policies.3 There is a strong
1
By “colonial experience” we do not only mean the
directcontrolof the colonies by Europeanpowers, but more
generally, Europeaninfluence on the rest of the world. So
according to this definition, Sub-Saharan Africa was
strongly affected by “colonialism” between the sixteenth
and nineteenthcenturiesbecause of the Atlantic slave trade.
2
Note thatalthoughonly some countrieswere colonized,
there is no selection bias here. This is because the question
we are interested in is the effect of colonization policy
conditional on being colonized.
3Government expropriationis not the only institutional
feature that matters. Our view is that there is a “clusterof
VOL.91 NO. 5
ACEMOGLUET AL.: THE COLONIALORIGINSOF DEVELOPMENT
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