- Question 6 Credit Question 25 Marks An Ngo Is Considering Offering Microfinance Loans To Households In Sierra Leone 1 (95.15 KiB) Viewed 61 times
Question 6 (Credit question - 25 marks) An NGO is considering offering microfinance loans to households in Sierra Leone, and asks you to consult in whether microfinance increases household income. They have conducted a household survey, and know whether a household has a microfinance loan (MF) and their monthy income (IN) in thousands of leones. They suggest the following (short) regression: IN Botß, MF; + ui However, you know that households where the household head has a lot of education (ED) often have much more income. That means the true long regression should be: IN; = Bo + BMFi + B2ED; + Ui 1. Intuitively, without making any calculations, what do you think the direction of bias will be in the short regression? Why? 2. What would the auxiliary regression be for this analysis (regression between the omitted and the main variable)? Write it out. 3. Plug the auxiliary regression equation into the long regression equation above and derive the formula describing how the coefficient from the short regression relates to the coefficient for the long regression. 4. Because you are a responsible consultant, you collect data on household head education and calculate the following: 650.2 10.3MF 15.4ED; IN; = (2.1) (6.2) You also run the auxiliary regression, and find a coefficient on MF; of 1.5 (0.3) What coefficient would you have found if you had run the short regression as suggested by the NGO? What conclusion might this have led you to reach? =