Question

A school district undertakes an experiment to estimate the effect of class size on test scores in second-grade classes. The district assigns 50% of its previous year’s first graders to small second-grade classes (18 students per classroom) and 50% to regular-size classes (21 students per classroom). Students new to the district are handled differently: 20% are randomly assigned to small classes and 80% to regular-size classes. At the end of the second-grade school year, each student is given a standardized test. Let Yi denote the test score for the ith student, Xi denote a binary variable that equals 1 if the student is assigned to a small class, and Wi denote a binary variable that equals 1 if the student is newly enrolled. Let β1 denote the causal effect on test scores of reducing class size from regular to small.

a. Consider the regression Yi= β0 + β1Xi+ ui. Do you think that E[ui|Xi] = 0? Is the OLS estimator of β1 unbiased and consistent? Explain.

b. Consider the regression Yi= β0 + β1Xi + β2Wi+ ui. Do you think that E[ui|XiWi] depends on Xi? Is the OLS estimator of β1 unbiased and consistent? Explain. Do you think that E[ui|Xi,Wi] depends on Wi? Will the OLS estimator of β2 provide an unbiased and consistent estimate of the causal effect of transferring to a new school (that is, being a newly enrolled student)? Explain.

Answer 1