Two-way fixed-effect modelsDifference in difference
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Two-way fixed effects
Balanced panels
i=1,2,3….N groups
t=1,2,3….T observations/group
Easiest to think of data as varying across states/time
Write model as single observation
Yit=α + Xitβ + ui + vt +εit
Xit is (1 x k) vector
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Three-part error structure
ui – group fixed-effects. Control for permanent differences between groups
vt – time fixed effects. Impacts common to all groups but vary by year
εit -- idiosyncratic error
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Excises taxes on poor health
Alcohol and cigarettes are taxed at the federal, state and local level
Some states sell liquor rather than tax it (VA, PA, etc.)
Most of these taxes are excise taxes -- the tax is per unit
Rates differ by type of alcohol, alcohol content
Nearly all cigarettes taxed the same
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Current excise tax rates
Cigarettes
Low: SC($), MO ($), VA($)
High: RI ($), NY ($); NJ($)
Average of $ across states
Average in tobacco producing states: $
Average in non-tobacco states, $
Average price per pack is $
Beer
Low (WY, $)
High (SC, $)
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Federal taxes
Cigarettes, $
Wine
$ bottle for 14% alcohol or less
$ bottle for 14 – 21% alcohol
Beer, $ a can
Liquor, $ per 100 proof gallon (50% alcohol), or, $ ml bottle of 80 proof liquor
Total taxes on cigarettes are such that in NYC, you spend more in taxes buying one case of cigarettes than if you buy 33 cases of wine.
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Do taxes reduce consumption?
Law of demand
Fundamental result of micro economic theory
Consumption should fall as prices rise
Generated from a theoretical model of consumer choice
Thought by economists to be fairly universal in application
Medical/psychological view – certain goods not subject to these laws
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Starting in 1970s, several authors began to examine link between cigarette prices and consumpti
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