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In a model of charitable giving we are interested in the impact of income on the level of giving from 90 individuals over 10 years.
In a model of charitable giving we are interested in the impact of income on the level of giving from 90 individuals over 10 years. A pooled regression model using the data is as follows: Cit = Bo + Biincit + B2ageit + Bztalit + Eit. where Cit is the level of charitable giving for the ith indiviudal in period t, incit, ageit and talit are the individual's respective income, age and marginal tax rate in period t and Eit is an error term, assumed to have the usual properties. (a) Explain what would be meant by an individual fixed effect in the context of the suggested model. [5 MARKS] (b) What would be the impact of ignoring the presence of individual fixed effects on our conclusions about the impact of income on charitable giving? 8 MARKS] (c) Describe a Fixed Effects estimation procedure which could be used to deal with the issues relating to the issues discussed in part b), stating clearly any assumptions you make. [12 MARKS]
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