Overview

Congratulations! You have been hired by British Consulting Group . Your first task involves  providing  econometric  advice  and  analysis  in  an  ongoing  legal  case  in Sydney, Australia. A chemical firm (ChemXcom) has been found guilty of various offences under the Federal Government’s Environment Protection and Biodiversity Conservation Act. These offences relate to illegal dumping of chemicals and the resultant pollution associated with one of the firm’s plants in a particular area in the outer  suburbs  of  Sydney  over  the  period  2008  to  2011.  While  guilt  has  been determined, the Court has not yet assessed damages. One aspect of damages is a claim for compensation being made by people in the affected community where the evidence being presented is in terms of the alleged impact on housing prices.

Not surprisingly in such cases, there is considerable disagreement between both sides of the case in terms of the amount of damages. Again, ChemXcom has accepted the guilty verdict and they do not intend to appeal. The case is now about quantum – how much will the firm be liable for in terms of damages?

The judge in the case is not convinced that the damages amount to $45,000 per household, which is the initial claim submitted by the plaintiffs. She is also not satisfied with the quality of the econometric work produced by Star Consulting Group (SCG) on behalf of the defendant. She has called in British Consulting Group to act as the independent arbitrator who will report directly to her. In outlining what is required, the judge has stressed that the central question to be addressed is:

In the affected community, what was the impact on housing prices that can be attributable  to  the pollution  and degradation  of the  environment caused by ChemXcom?

British Consulting Group has been provided with a report from SCG, retained by the defendant, together with the data on which the SCG’s analysis was based.

Attachment 1: SCG Report

The PDF file Main_SCGreport.docx contains the report submitted by SCG on behalf of the defendant.

Attachment 2: SCG Data

The Stata file Main_SCGdata_2022.dta stores the data used in the SCG report. You will find 142 observations on 9 variables, which include:

id: a house identifier

yr: year of sale

area: area of house (square meters)

size: size of block of land (square meters)

age: age of house (years)

distance: distance of house from ChemXcom plant (kilometers)

rooms: number of rooms in house

air: annual air quality index

price: real sale price of house (in ‘000s of 2010 dollars)

SUMMATIVE ASSESSMENT TASK

Produce a written report which addresses the judge’s question. As part of your report, you must:

•    replicate Table 1, equation (2), and equation (3) reported by the defendant’s consulting firm, MSG and validate whether their results are correct; also report the full regression estimation results including coefficients, standard errors and t-statistics  (note  that  the  consulting  company  report  only  included  the coefficients);

•    critically evaluate their econometric approach;

•    propose your own econometric approach which addresses the limitations that you have identified;

•    report and discuss new estimation results based on your own approach;

•    and outline any additional data that you require to improve the quality of your econometric analysis.

GENERAL TIPS

•    Your report can follow any structure as long as you express your ideas clearly in academic English. You can include an executive summary if you think it will help  you  to  communicate  your  ideas  effectively.  If you  would  like  further guidance on how to write an empirical research report, you can consult            “Chapter 19. Carrying Out an Empirical Project” in the required textbook for this module, i.e., Introductory Econometrics (7th ed.) by Jeffrey M. Wooldridge.

•    In your critical evaluation and econometric analysis, you should focus on issues that enable you to demonstrate your understanding of the content taught in this module. For example, you can consider whether the SCG’s justification for their model specification is tenable given the algebraic and statistical properties of the OLS estimator; whether the SCG has paid due attention to omitted variable bias; and whether the SCG has followed an appropriate approach to hypothesis testing.

•    Your additional data requirements must be stated as precisely as possible. For example, you must not simply write that you require an instrumental variable: You must name what instrumental variable you have in mind, summarise what you will use it for, and explain why you expect it to be relevant and exogenous.

Please be reminded that the SCG report is not a model answer to this assignment: The judge is not satisfied with their report.

Overall word limit: 1000