(a) Run an OLS regression of logarithm wage (lwage) on years of schooling (educ), i.e.,lwagei = α + βeduci + ui.

Use a sentence to interpret βˆOLS.

(b) Use ivreg command to run a Two Stage Least Squares (2SLS) regression. Use father’s years of schooling (fatheduc) as the instrument variable. Use a sentence to interpret βˆ 2SLS.

(c) Check the F-statistics from the first-stage regression. How large it is? Is the instrument variable weak?

(d) Perform a Hausman’s test to compare OLS with 2SLS estimators. Write down your test hypoth- esis, p-value and conclusion.

(e) Discuss if father’s years of schooling (fatheduc) is a solid instrument variable, i.e., satisfies con- ditions of instrument variables.

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