Problem 2: Demand for Democracy (70 marks) Background: Do citizens demand more democracy and political freedom as their incomes grow? That is, is democ racy a normal good? To investigate this issue, you will explore the dataset Incomeemocracynta which contains a panel data set from 195 countries for the years 1960, 1965, , 2000. A detailed description is given in Incomejemocracyjescription.pdf .1 The dataset contains an index of politi cal freedom/democracy for each country in each year, together with data on the country's income and various demographic controls. (The income and demographic controls are lagged ve years relative to the democracy index to allow time for democracy to adjust to changes in these variables.) Research tasks: 1. Is the data set a balanced panel? Explain. (5 marks) 2. The index of political freedom/democracy is labeled dem_ind. (a) What is the value of dem_ind for the United States in 2000? \"that is the average of dem_ind for the United States over all years in the data set? (4 marks) Repeat this exercise for Libya (2 marks). (b) List ve countries with an average value of demimi greater than 0.95; less than 0.10; and between 0.3 and 0.7. (5 marks) 3. The logarithm of per capita income is labeled loggdppc . (a) Regress dem_ind on log_gdppc using standard errors that are clustered by country (3 marks). (b) How large is the estimated coefcient on loggdppc? Is the coeicient statistically signi cant? (2 marks) (c) If per capita income in a country increases by 20%, by how much is dem_ind predicted to increase? What is a 95% condence interval for the prediction? Is the predicted increase in dem_ind large or small? Explain what you mean by large or small. (5 marks) (d) Why is it important to use clustered standard errors for the regression? Do the results change if you do not use clustered standard errors? (4 marks) 4. (a) Suggest a variable that varies across countries but plausibly varies littleor not at allover time and that could cause omitted variable bias in the regression in (c). (5 marks) (b) Estimate the regression in (c), allowing for country xed e'ects. How do your answers to (c)(i) and (c)(ii) change? (5 marks) (c) Exclude the data for Azerbaijan and rerun the regression. Do the results change? Why or why not? (5 marks) (d) Suggest a. variable that varies over time but plausibly varies littleor not at allacross coun tries and that could cause omitted variable bias in the regression in (c). (5 marks) (e) Estimate the regression in (c), allowing for time and country xed effects. How do your answers to (c)(i) and (c)(ii) change? (5 marks) (I) There are addition demographic controls in the data set. Should these variables be included in the regression? If so, how do the results change when they are included? (5 marks) 5. Based on your analysis, what conclusions do you draw about the effects of income on democracy? (10 marks) 1These data were provided by Daron Acemoglu of M.I.T. and were used in his paper with Simon Johnson, James Robinson, and Pierre Yared, \"Income and Democracy,\" American Economic Review, 2008, 98:3. 808842