- Question 6 Credit Question 25 Marks You Are Interested In Studying How Poor Households Respond To Positive Income Sh 1 (90.83 KiB) Viewed 59 times
Question 6 (Credit question - 25 marks) You are interested in studying how poor households respond to positive income shocks, specifically whether they save or consume the extra money that comes their way. You will explore this question by analyzing the decisions of fishermen of a small town. The price of the fish depends on the quality of the catch in both the ocean and the nearby lake. You learn that the price fisherman receive for their catch fluctuates on a daily basis based on ocean currents. For simplicity, we'll say that you construct a "bad day for ocean fishing" current index, which increases when ocean conditions are worse for fishing. The higher the current index, the higher prices and the more money a fisherman fishing in the lake receives (since they are not affected by the currents). You collect data on the current index and fish and survey various the fisherman fishing in the lake to find out their spending and other home characteristics. 1. Explain how you would use this set-up to examine the impact of positive fluctuations in income on spending (hint: use bad day for fishing index as an instrument). 2. Why bad day for fishing index might be a good instrument? Are there any concerns about it? 3. How would you formulate the first stage? Spell out the exact equation you would run. 4. Outline two different ways you would estimate the treatment effect of extra income on spending. Be specific and describe the equations. 5. Comment on the external validity of the results (how broadly the results seem to apply).