ECONOMICS HOMEWORK YOU MUST KNOW HOW TO USE R

ECO 337

Labor Economics

Second Midterm

December 8 2016

Rules

• Due: Sunday December 11, 23:59 PM.

• You can work this part individually or in a group of no more than three people.

• Submission is individual, but you have to indicate in your document the name of all the members of the group.

• Submit your solution the same way that you submitted the empirical homeworks: create a document with the answers to the questions and the R code.

• The submission is via Blackboard and Blackboard only. No emails, no hard copies, no excuses. You will have plenty of time to do it right.

• And very important: you are not allowed to do this part if you didn’t take the in-class exam. If you missed the in-class exam for any reason, you have to take the final on December 19th.

Empirical Problem

As a part of your job in a research institution, you are asked to work with a group of other colleagues on a model of household labor/leisure choice. You optimally decide to split the problem among the members of the group: other colleagues solve the mathematical problem, while you are in charge of the empirical part. They tell you that, after carefully analyzing the problem, they reached two different solutions under two different behavioral assumptions. Under the first behavioral assumption, the members of the household play a Stackelberg game to decide how much is their optimal choice of leisure. Under this assumption, the preferences for leisure of an individual i on household consisting of individuals i and j is:

λi = wiLi

wiT + wjT + V

if individual i is the one that chooses first and individual j chooses depending on what individual i decided.

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Under the second behavioral assumption, the members of the household behave independently and they reach a Nash Equilibrium. In this case, the preferences for leisure for an individual i on household consisting of individuals i and j is:

λi = wiLi

wiT + wj(T − Lj) + V

In both cases, Li and Lj are the optimal choices of leisure of individuals i and j respectively, wi and wj are the wage rates of individuals i and j, V is the non-labor income of the household and T is the total discretionary time of the individual (112 hours a week).

Your work now is to estimate the preferences for leisure of the husband in a panel of households selected from the 2005 wave of the Panel Study of Income. Dynamics (PSID).

1. Estimate the preferences for leisure of all the individuals in the sample under the two different behavioral assumptions. NOTE: Write any additional assumptions that you make.

2. Plot a histogram of the estimated λi’s under the two behavioral assumptions.

3. After observing these graphs, can you tell which behavioral assumption is correct?

4. If someone asks you which of these two assumptions make husbands happier, what would be your answer? Why?

Data Variables

The dataset house hours.txt consists of a sample of households in the PSID in which both spouses are between the ages of 30-49 and both work. It contains five variables:

• Weekly hours of work of husband

• Hourly wage of husband

• Weekly hours of work of wife

• Hourly wage of wife

• Weekly non labor income of the household

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