University of Oregon
Department of Economics
HOMEWORK 3
ECN 607 – Econometrics II: Applied Microeconometrics
Prof. Bruce Blonigen Due Date: Thursday, Feb. 5
For this homework, we will continue to use the USFDIMaster database and be estimating
modified versions of the Carr, Markusen, and Maskus (CMM) model of FDI determinants using
data on U.S. outbound FDI activities. We’ll begin with the following log-log base specification
from homework 1:
reg lrpos lsumgdp lgdpdifsq lskdiff lht_tcost lhm_tcost lht_beri ldistance if outbound==0;
which yields the following results:
Source | SS df MS Number of obs = 892
-------------+------------------------------ F( 7, 884) = 74.85
Model | 1447.03983 7 206.719976 Prob > F = 0.0000
Residual | 2441.38939 884 2.7617527 R-squared = 0.3721
-------------+------------------------------ Adj R-squared = 0.3672
Total | 3888.42922 891 4.3641181 Root MSE = 1.6619
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lrpos | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
lsumgdp | 3.729948 .8214597 4.54 0.000 2.117709 5.342187
lgdpdifsq | -.669287 .3119789 -2.15 0.032 -1.281593 -.0569813
lskdiff | -.0924125 .1253975 -0.74 0.461 -.3385241 .1536991
lht_tcost | -.0681695 .0361272 -1.89 0.059 -.1390745 .0027356
lhm_tcost | 1.062487 3.970349 0.27 0.789 -6.729923 8.854897
lht_beri | -2.67275 .2543142 -10.51 0.000 -3.17188 -2.17362
ldistance | -1.065663 .1085663 -9.82 0.000 -1.278741 -.8525855
_cons | 1.42479 28.47055 0.05 0.960 -54.45296 57.30254
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1) Endogeneity Concerns.
A) The variable lht_beri is a measure of the “costs of FDI” and is an index of how a country in a
given year is perceived in terms of its business climate, legal protection of foreign assets, etc.
Provide an explanation for why this variable may be endogeneous.
B) The USFDIMaster dataset contains variables connected with bilateral tax treaties between
countries that determine tax rates on repatriated income from foreign affiliates. One of these is
“ageeff”, the number of years that a country has had a bilateral tax treaty with the U.S., where “0”
indicates that no treaty exists with the U.S. Explain how well you think this variable meets the
criteria for an instrumental variable. Run 2SLS using this variable as an instrument and calculate
