There are three problems in this homework. Be aware that this assignment is relatively long. It is also gets a higher weight in the course grade, but you have 50% more time to do it than the other HWs. Problems 1 and 2 should be submited in the standard format we've used many times: The first pages should contain your answers to all the questions, along with showing any key algebraic equations or explanations you need to use along the way. After that, include a printout of the output from the regressions you executed in support of your answers. Highlight any numbers in this output that you used in the first section. (You are encouraged to save paper here, you may print this section with a small font, double-sided and/or with 2-up format.) Last,

include a copy of the DO file that contains the commands you asked STATA to execute. Be sure you organize these in a way that will be clear to the reader. Problem 3 will be presented in a slightly different, more polished style. Please refer to that specific problem for details. Problem 1 (50 points total) The file Divorce.dta contains a four-period panel data set including various socioeconomic factors for all 50 US states plus the District of Columbia. The panels were taken in 1965, 1975, 1985, 1995. The variables are: divorce: number of divorces and annulments per state per one thousand population. birth: number of live births per state per one thousand population. marriage: number of marriages per state per one thousand population. unemploy: total unemployment rate as a percentage of the total work force. crime: total # of criminal offenses known to police per one hundred thousand population. AFDC: average monthly AFDC payments per family. (AFDC is commonly known as Welfare, an income support payment by the government to certain low income groups, particularly unmarried women with children.) Part 1) a) Tell STATA this is a panel data set, with panels defined by entities "state" across periods "time.". The command for this is: xtset state time. b) Divorce will be our dependent variable throughout. Hypothesize the sign of the coefficients (or zero) that each of the independent variables in the dataset will have on divorce rates. Briefly provide an explanation of your thinking. c) Run a regression of divorce on birth, marriage, unemployment, crime, afdc using the entire pooled dataset. I'll call this the "nave" regression. Report the coefficients and their p-values. Which, if any of the variables have a sign different from what you hypothesized? Part 2) a) Run a fixed effects regression using dummy variables for each state. Use the same variables as part 1c. The command for this is: regress variables i.state. Report your coefficients and p-values for all variables EXCEPT the state dummies. Are there any substantial changes in the fixed effect regression vs the "nave" pooled regression? b) All else equal, what is the difference in the divorce rate for Mississipi vs. Oregon. (You'll have to open the data to see how these two states are distinguished.)

c) If AFDC payments increase by 200, what is the predicted increase in the divorce rate. Part 3) a) Use the built-in fixed effects regression command: xtreg variables, fe robust. Note that the coefficients resulting from this are identical to part 2a. (Don't forget the fe part or you won't get a fixed effects regression.) b) Add to the regression of 3a a series of dummy variables to account for the time period. That is, estimate xtreg variables i.time, fe robust . This essentially adds fixed-effects terms for time, in addition to the state specific fixed effects. Report your coefficients and p-values. c) From the results of 3b, how much higher is the divorce rate in 1995 compared to 1965? d) Once we have controlled for time, how has the effect of AFDC payments on divorce rates changed compared to in 2a? e) You hear someone argue that social welfare programs like AFDC contribute to the decline of the American family. His argument is that when AFDC provides financial support to poor single women with children (but not married women with children), this lowers the cost of divorce for poor families. Indeed, it might even encourage divorce in order to receive the payments. Without getting into any ethical considerations, what is your reading of the evidence from this problem in favor and/or against this argument. Utilize your results from part 2 and 3 and write a two or three paragraph, clearly articulated response. You are encouraged to run additional regressions if you feel it is useful.