A commonly used method in empirical work is the differencein

A commonly used method in empirical work is the “difference-indifference” estimator. This question uses an example to help you understand how this estimator works. Our interest is to analyze the effect of a new garbage incinerator on housing values. We will use two years of data to motivate the differencein- difference measure. The rumors that a new incinerator would be built in North Andover, Massachusetts began after 1978, and construction began in 1981. The incinerator was expected to be in operation soon after the start of construction. We will use data on prices of houses that sold in 1978 and another sample on those that sold in 1981. The hypothesis is that the price of houses located near the incinerator would fall below the price of more distant houses. For illustration, we define a house to be near the incinerator if it is within three miles. We measure all housing prices in 1978 dollars. Let rprice denote the house price in real terms. One way to analyze the effect of garbage incinerator on housing prices is to use only the 1981 data and estimate a very simple model: , 0 1 rprice nearinc u where nearinc is a binary variable equal to one if the house is near the incinerator, and zero otherwise. Estimating this equation using the 1981 data gives: rprˆice 101,307.5 30,688.27nearinc (3,093) (5827.71) n=142, R-squared = .165

Solution

rprice =101307.5 - 30,688.27*(nearinc)........

the slope = -30688.27 i.e, where nearince = 1 , the value of rprice will decrease by 30688.27 amount!

i.e, if the if the house is near the incinerator the house price will decrease by  30688.27......

test:

H0 : new garbage incinerator and housing values are independent ag. H1 : dependent!

test statistic = slope / ( std. error of slope) = -30,688.27 / 5827.71 = -5.265923....

d.f = 142-2 = 140..

p-value = 0.0000002569471....
which is way less than level of significance = 0.05..
R2 = .165 i.e, only 16.5% of variance of rprices will be explained by variation of nearinc!

so, we will reject H0 and state that nearinc is significant factor in estimating house prices....
i.e, location of new garbage incinerator and housing values are related to each other, and there exists a association!

and also presence of incinator has a negative impact on house prices!...