Class 15: Instrumental Variables Part II

Today, we employ the IV estimator in the context of demand estimation for cigarettes. We also introduce the idea of a “fixed effect” in a regression specification.

Objectives

• Understand and use an IV estimator in R
• Define and explain a fixed effect in a regression context
• Understand and describe the problem of weak instruments and how to test for weak instruments empirically

Activities

• Continue work with the CDC Tax Burden on Tobacco data
• Estimate the price elasticity of demand for cigarettes using taxes as an instrument for price