Does education reduce crime? If so, spending more on education could be a longterm tool in the fight against crime. The file inmates.dta contains data used by Lochner and Moretti in their 2004 article on the effects of education on crime. Table 9.10 describes the variables.

(a) Estimate a model with prison as the dependent variable and education, age, and African-American as independent variables. Make this a fixed effects model by including dummies for state of residence (state) and year of census data (year). Report and briefly describe the results.

Based on the OLS results, can we causally conclude that increasing

(b) education will reduce crime? Why is it difficult to estimate the effect of education on criminal activity?

(c) Lochner and Moretti used 2SLS to improve upon their OLS estimates. They used changes in compulsory attendance laws (set by each state) as an instrument. The variable ca9 indicates that compulsory schooling is equal to 9 years, ca10 indicates that compulsory schooling is equal to 10 years, and cal1 indicates that compulsory schooling is equal to 11 or more years. The control group is 8 or fewer years. Does this set of instruments satisfy the two conditions for good instruments?

(d) Estimate a 2SLS model using the instruments just described and the control variables from the OLS model above (including state and year dummy variables). Briefly explain the results.

(e) 2SLS is known for being less precise than OLS. Is that true here? Is this a problem for the analysis in this case? Why or why not?

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TABLE 9.10 Variables for Education and Crime Data Variable name Description prison educ age AfAm state year ca9 ca10 call Dummy variable equals 1 if the respondent is in prison and 0 otherwise Years of schooling Age Dummy variable for African-Americans State of residence (FIPS codes) Census year Dummy equals 1 if state compulsory schooling equals 9 years and 0 otherwise Dummy equals 1 if state compulsory schooling equals 10 years and 0 otherwise Dummy equals 1 if state compulsory schooling is 11 or more years and 0 otherwise FIPS codes are Federal Information Processing Codes for states (and also countries).