Econometrics

Thomas Eisensee and Stromberg wanted to measure how much news coverage of a foreign disaster impacted the amount of disaster relief provided by the U.S. government.

They argue that the simple relationship would be biased.

Let X = Minutes of News Coverage and Y= Disaster Aid. Choose a variable X2 that could bias the simple relationship. This variable should impact the amount of coverage and impact the amount of aid for reasons other than purely news coverage.

1. Eisensee and Stromberg introduce an instrument Z = During the Olympics. Explain how Z could satisfy the relevant and exogenous criteria.

2. Explain how you could use Z to estimate the impact of X on Y free from X2 bias. Hint: you should mention two stages.