The following two equations describe property crime and police expenditures across U. S. cities: Crimei 5 a0 1 a1Policei 1 a2Incomei 1 u1,i Policei 5 b0 1 b1Crimei 1 b2Incomei 1 b3Liberali 1 u2,1 Crime i 5 Number of crimes committed in city i last year Police i 5 Total spending on the police force in city i last year Income i 5 Average income in city i last year Liberal i 5 Share of votes received by the liberal presidential candidate from city i in the last election a. If you were to estimate these two equations with OLS, would you get consistent estimates? Why or why not?
b. Which of the two equations is fully identified? How do you know this?
c. Describe how you would estimate one or both of the equations using 2SLS. Describe the properties of the estimates in both equations.
(All questions should be solved)