BOSTON COLLEGE
Department of Economics

EC 228 Econometrics, Prof. Baum, Ms. Yu, Fall 2003

Problem Set 2

Due at classtime, 25 September 2003

Problem sets will not be accepted after their due dates. Please make sure your name is legible on each page of your answers.

1. Do the following exercise with Stata (available in the SLSC). Hand in a printout of your work (most easily done by turning on "log", and then printing the log when you are finished). To access the data (over the Internet), you will use the command

use http://fmwww.bc.edu/ec-p/data/wooldridge/ceosal2,clear

to read in the data set (as described on the course home page). The description of variables may be accessed in Stata via the command

type http://fmwww.bc.edu/ec-p/data/wooldridge/CEOSAL2.des

or by viewing that web page in your browser. When it reads it successfully, you will just get a dot prompt.
a. What is the average salary and average tenure of CEOs in this sample? (hint: use the summarize command)
b. Test the hypothesis that the average CEO salary is a million dollars (note that salary is measured in thousands of dollars; see the ttest command (help ttest)
c. Test the hypothesis that CEOs that went to college make more money (again, help ttest; you will use the "by" option). Does the result surprise you? Why do you suppose this is so?
d. How many CEOs attended graduate school? Do they make more money than those who did not?
e. Theory would suggest that executive pay should be related to profitability of the firm. Using the variable profmarg, calculate the correlation between profitability and salary. What do you find? How might you explain your findings? (hint: help correlate)
For some of these problems, you must use Stata, but will not make use of the RAW files listed in the text, as all of these data are available in Stata format over the Internet. Please consult the "Wooldridge datasets: descriptions and access commands" link on the course home page. All you need to do is copy the "use http://fmwww..." line from each dataset to be used into Stata's command window. The name of each dataset is that given in the text, without the .RAW extension; e.g. CEOSAL2.RAW is referred to as just CEOSAL2 (with no period nor extension). For example,

. use http://fmwww.bc.edu/ec-p/data/wooldridge/ceosal2

For each of the empirical problems, hand in a printout from Stata, annotated with your comments. The "log" icon in the Stata toolbar may be used to create a file containing both your commands and Stata's response. It may be easier to work with a text-format log; the command 'log using ps2.log' will create a text log. Use the 'Viewer' within Stata to examine and print the log.

Stata commands you may need (use "help" within Stata for those commands):