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 CONTENTS

Preface xiii
Acknowledgments xvii
A personal message from the author xx
List of tables xxii
List of figures xxix

Part I: Basics of linear regression

1 The linear regression model: an overview 2

1.1 The linear regression model 2
1.2 The nature and sources of data 5
1.3 Estimation of the linear regression model 6
1.4 The classical linear regression model (CLRM) 8
1.5 Variances and standard errors of OLS estimators 10
1.6 Testing hypotheses about the true or population regression coefficients 11
1.7 R2: a measure of goodness of fit of the estimated regression 13
1.8 An illustrative example: the determinants of hourly wages 14
1.9 Forecasting 19
1.10 The road ahead 19
Exercises 22
Appendix: The method of maximum likelihood (ML) 25
2 Functional forms of regression models 28
2.1 Log-linear, double log or constant elasticity models 28
2.2 Testing validity of linear restrictions 32
2.3 Log-lin or growth models 33
2.4 Lin-log models 36
2.5 Reciprocal models 38
2.6 Polynomial regression models 40
2.7 Choice of the functional form 42
2.8 Comparing linear and log-linear models 43
2.9 Regression on standardized variables 44
2.10 Regression through the origin: the zero-intercept model 46
2.11 Measures of goodness of fit 49
2.12 Summary and conclusions 50
VIII CONTENTS

Exercises 51
3 Qualitative explanatory variables regression models 53
3.1 Wage function revisited 53
3.2 Refinement of the wage function 55
3.3 Another refinement of the wage function 56
3.4 Functional form of the wage regression 59
3.5 Use of dummy variables in structural change 61
3.6 Use of dummy variables in seasonal data 64
3.7 Expanded sales function 66
3.8 Piecewise linear regression 69
3.9 Summary and conclusions 73
Exercises 74

Part II: Regression diagnostics

4 Regression diagnostic I: multicollinearity 80

4.1 Consequences of imperfect collinearity 81
4.2 An example: married women’s hours of work in the labor market 84
4.3 Detection of multicollinearity 85
4.4 Remedial measures 87
4.5 The method of principal components (PC) 89
4.6 Summary and conclusions 92
Exercises 93
5 Regression diagnostic II: heteroscedasticity 96
5.1 Consequences of heteroscedasticity 96
5.2 Abortion rates in the USA 97
5.3 Detection of heteroscedasticity 100
5.4 Remedial measures 103
5.5 Summary and conclusions 110
Exercises 110
6 Regression diagnostic III: autocorrelation 113
6.1 US consumption function, 1947–2000 113
6.2 Tests of autocorrelation 115
6.3 Remedial measures 121
6.4 Model evaluation 126
6.5 Summary and conclusions 129
Exercises 129
7 Regression diagnostic IV: model specification errors 131
7.1 Omission of relevant variables 131
7.2 Tests of omitted variables 135
7.3 Inclusion of irrelevant or unnecessary variables 138
7.4 Misspecification of the functional form of a regression model 139
7.5 Errors of measurement 141
7.6 Outliers, leverage and influence data 142
7.7 Probability distribution of the error term 145
7.8 Random or stochastic regressors 147
 CONTENTS IX

7.9 The simultaneity problem 147

7.10 Dynamic regression models 153
7.11 Summary and conclusions 162
Exercises 163
Appendix: Inconsistency of the OLS estimators of the
consumption function 167 I
Part III: Topics in cross-section data

8 The logit and probit models 170

8.1 An illustrative example: to smoke or not to smoke 170
8.2 The linear probability model (LPM) 171
8.3 The logit model 172
8.4 The language of the odds ratio (OR) 180
8.5 The probit model 181
8.6 Summary and conclusions 184
Exercises 185
9 Multinomial regression models 190
9.1 The nature of multinomial regression models 190
9.2 Multinomial logit model (MLM): school choice 192
9.3 Conditional logit model (CLM) 198
9.4 Mixed logit (MXL) 201
9.5 Summary and conclusions 201
Exercises 203
10 Ordinal regression models 206
10.1 Ordered multinomial models (OMM) 207
10.2 Estimation of ordered logit model (OLM) 207
10.3 An illustrative example: attitudes toward working mothers 209
10.4 Limitation of the proportional odds model 212
10.5 Summary and conclusions 215
Exercises 216
Appendix: Derivation of Eq. (10.4) 218
11 Limited dependent variable regression models 219
11.1 Censored regression models 220
11.2 Maximum likelihood (ML) estimation of the censored regression
model: the Tobit model 223
11.3 Truncated sample regression models 227
11.4 A concluding example 229
11.5 Summary and conclusions 232
Exercises 233
Appendix: Heckman’s (Heckit) selection-bias model 234
12 Modeling count data: the Poisson and negative binomial regression models 236
12.1 An illustrative example 236
12.2 The Poisson regression model (PRM) 238
12.3 Limitation of the Poisson regression model 242
12.4 The Negative Binomial Regression Model (NBRM) 244
X CONTENTS

12.5 Summary and conclusions 244

Exercises 245

Part IV: Time series econometrics

13 Stationary and nonstationary time series 250

13.1 Are exchange rates stationary? 250
13.2 The importance of stationary time series 251
13.3 Tests of stationarity 251
13.4 The unit root test of stationarity 255
13.5 Trend stationary vs. difference stationary time series 258
13.6 The random walk model (RWM) 262
13.7 Summary and conclusions 266
Exercises 267
14 Cointegration and error correction models 269
14.1 The phenomenon of spurious regression 269
14.2 Simulation of spurious regression 270
14.3 Is the regression of consumption expenditure on disposable income
spurious? 271
14.4 When a spurious regression may not be spurious 274
14.5 Tests of cointegration 275
14.6 Cointegration and error correction mechanism (ECM) 276
14.7 Are 3-month and 6-month Treasury Bill rates cointegrated? 278
14.8 Summary and conclusions 280
Exercises 281
15 Asset price volatility: the ARCH and GARCH models 283
15.1 The ARCH model 284
15.2 The GARCH model 290
15.3 Further extensions of the ARCH model 292
15.4 Summary and conclusions 294
Exercises 295
16 Economic forecasting 296
16.1 Forecasting with regression models 296
16.2 The Box–Jenkins methodology: ARIMA modeling 302
16.3 An ARMA model of IBM daily closing prices, 3 January 2000 to
31 October 2002 304
16.4 Vector autoregression (VAR) 310
16.5 Testing causality using VAR: the Granger causality test 315
16.6 Summary and conclusions 319
Exercises 320
Appendix: Measures of forecast accuracy 323

Part V: Selected topics in econometrics

17 Panel data regression models 326

17.1 The importance of panel data 326
17.2 An illustrative example: charitable giving 327
 CONTENTS XI

17.3 Pooled OLS regression of charity function 328

17.4 The fixed effects least squares dummy variable (LSDV) model 330
17.5 Limitations of the fixed effects LSDV model 332
17.6 The fixed effect within group (WG) estimator 333
17.7 The random effects model (REM) or error components model (ECM) 335
17.8 Fixed effects model vs. random effects model 336 I
17.9 Properties of various estimators 339
17.10 Panel data regressions: some concluding comments 339
17.11 Summary and conclusions 340
Exercises 341
18 Survival analysis 344
18.1 An illustrative example: modeling recidivism duration 344
18.2 Terminology of survival analysis 345
18.3 Modeling recidivism duration 348
18.4 Exponential probability distribution 348
18.5 Weibull probability distribution 351
18.6 The proportional hazard model 353
18.7 Summary and conclusions 355
Exercises 356
19 Stochastic regressors and the method of instrumental variables 358
19.1 The problem of endogeneity 359
19.2 The problem with stochastic regressors 360
19.3 Reasons for correlation between regressors and the error term 363
19.4 The method of instrumental variables 367
19.5 Monte Carlo simulation of IV 369
19.6 Some illustrative examples 370
19.7 A numerical example: earnings and educational attainment of
youth in the USA 373
19.8 Hypothesis testing under IV estimation 378
19.9 Test of endogeneity of a regressor 379
19.10 How to find whether an instrument is weak or strong 381
19.11 The case of multiple instruments 381
19.12 Regression involving more than one endogenous regressor 384
19.13 Summary and conclusions 385
Exercises 387
20 Beyond OLS: quantile regression 390
20.1 Quantiles 391
20.2 The quantile regression model (QRM) 392
20.3 The quantile wage regression model 392
20.4 Median wage regression 396
20.5 Wage regressions for 25%, 50% and 75% quantiles 397
20.6 Test of coefficient equality of different quantiles 400
20.7 Summary of OLS and 25th, 50th (median) and 75th quantile
regressions 401
20.8 Quantile regressions in Eviews 8 402
20.9 Summary and conclusions 403
XII CONTENTS

Exercises 404
Appendix: The mechanics of quantile regression 405
21 Multivariate regression models 407
21.1 Some examples of MRMs 407
21.2 Advantages of joint estimation 408
21.3 An illustrative example of MRM estimation with the same
explanatory variables 409
21.4 Estimation of MRM 410
21.5 Other advantages of MRM 413
21.6 Some technical aspects of MRM 414
21.7 Seemingly Unrelated Regression Equations (SURE) 417
21.8 Summary and conclusions 419
Exercises 422
Appendix 424

Appendices

1 Data sets used in the text 425

2 Statistical appendix 436
A.1 Summation notation 436
A.2 Experiments 437
A.3 Empirical definition of probability 438
A.4 Probabilities: properties, rules, and definitions 439
A.5 Probability distributions of random variables 439
A.6 Expected value and variance 442
A.7 Covariance and correlation coefficient 444
A.8 Normal distribution 445
A.9 Student’s t distribution 446
A.10 Chi-square (2) distribution 447
A.11 F distribution 447
A.12 Statistical inference 448
Exercises 451
Exponential and logarithmic functions 455

Index 460
 PREFACE

The primary objective of this second edition of Econometrics by Example, as in the

first edition, is to introduce the fundamentals of econometrics without complicated
mathematics and statistics. The emphasis throughout the book is on explaining
basic econometric theory with several worked examples using data from a variety
of fields. The intended audience is undergraduate students in economics, business,
marketing, finance, operations research and related disciplines. It is also intended
for students in MBA programs and for researchers in business, government and
research organizations.

Major features
◆ In-depth examples illustrate major concepts in econometrics.
◆ Wherever essential, I have included figures and computer outputs from software
packages, such as Eviews (version 8), Stata (version 12) and Minitab (version 16).
◆ The data used in illustrative examples and in the exercises are posted on the book’s
website.
◆ Some of the exercises included are for classroom assignment.
◆ A full list of the data sets and the descriptions of the variables used in analysis is
provided in Appendix 1.
◆ Appendix 2 provides the basics of statistics that are necessary to follow this book.

New for the second edition

◆ There are two brand new chapters on quantile regression modeling and multi-
variate regression models. Two further chapters on hierarchical linear regression
models and bootstrapping are available on the book’s website.
◆ There are new illustrated examples in several chapters.
◆ I have considerably expanded the data-based exercises. In all there are about 70
data-based examples and exercises.
The book is now divided into five parts.
Part I discusses the classical linear regression model, the workhorse of economet-
rics, in considerable detail. These chapters form the foundation for the rest the
book. Some of the new topics discussed relate to the regression through the origin,
XIV PREFACE

or zero-intercept model, which is illustrated by the well-known capital asset pricing

model (CAPM) of financial theory, using UK stock market data. Another topic
included is the piecewise linear regression, in which linear segments of a regression
line are joined at certain break points, known as knots.
Part II examines critically the assumptions of the classical linear regression
model. Specifically, we discuss the topics of multicollinearity, heteroscedasticity,
autocorrelation, and model specification errors. We also discuss the topics of simul-
taneous equation bias and dynamic regression models. All these topics are discussed
with concrete economic data, some of which are new to this edition. The chapter
on heteroscedasticity discusses some technical aspects of robust standard errors and
introduces the concepts of the heteroscedastic robust t statistic and heteroscedastic
robust Wald statistic. The chapter on autocorrelation discusses both the standard
and alternative Durbin tests of autocorrelation. It also discusses the limitations of the
popularly used Jarque–Bera test of normality in small samples. Several data-based
exercises are added in this part.
Part III deals with what are known as the Generalized Linear Models (GLM). As
the name indicates, they are generalizations of the classical linear regression model.
Recall that the classical model assumes that the dependent variable is a linear func-
tion of the regression parameters, that it is continuous, that it is normally distributed,
and that it has a constant variance. The assumption of normal distribution for the
error term is for obtaining the probability distributions of the regression coefficients
and for the purpose of hypothesis testing. This assumption is very crucial in small
samples.
GLMs are useful in situations where the mean of the dependent variable is a non-
linear function of the regression parameters, the dependent variable is not normally
distributed, and the error variance may be non-constant. The GLMs discussed in this
part are: logit and probit models, multinomial regression models, ordinal regression
models, limited dependent variable regression models, and models of count data
using Poisson and negative binomial regression models. All these models are illus-
trated with several concrete examples
Some chapter specific changes include a discussion of the odds ratios in logit and
probit models and the bivariate probit model that involves two yes/no type depen-
dent variables that may be correlated. Chapter 11, on limited dependent variable
regression models, includes a discussion of Heckman’s sample selection model,
popularly known as the Heckit model. This part of the text includes several new
exercises, including a project for classroom assignment.
Part IV discusses several topics frequently encountered in time series data. The
concepts of stationary and nonstationary time series, cointegrated time series, and
asset price volatility are illustrated with several sets of economic and financial data.
The topic of economic forecasting is of great interest to business and economic fore-
casters. Various methods of forecasting are discussed and illustrated. As in the other
parts of this text, new examples and exercises are interspersed throughout this part
of the book.
Part V, which includes two chapters that are new to this edition, deals with some
advanced topics in econometrics.
Chapter 17 on panel data regression models shows how one can study the behav-
ior of cross-sectional units (e.g. firms in a given industry) over a period of time and
some of the estimation problems in such an analysis. One example is the impact of
 PREFACE XV

income and beer tax on the sales of beer in 50 US states and Washington, DC, over
the period 1985–2000.
Chapter 18 on survival analysis considers the time until an event occurs, such
as the time until an unemployed worker finds employment, the time that a patient
diagnosed with leukemia survives until death, and the time between divorce and
remarriage. We discuss in this chapter how econometric techniques handle these I
situations.
Chapter 19 on stochastic regressors and the method of instrumental variables
addresses a thorny problem in regression analysis, which is the correlation between
the regression error term and one or more explanatory variables in the model. If such
a correlation exists, the OLS estimates of the regression parameters are not even
consistent; that is, they do not converge to their true values, no matter how large
the sample is. Instrumental, or proxy, variables are designed to solve this problem.
The instrumental variables (IV) must satisfy two criteria: First, they must be highly
correlated with the variables for which they are a proxy but are not correlated with
the error term. Second, the IVs themselves must not be possible explanatory vari-
ables in their own right in the model for which they are acting as instruments. These
requirements are often not easy to meet, but in some situations IVs can be found.
Chapter 20 on quantile regression (QR) is new to this edition. Unlike the OLS focus
on estimating the mean value of the dependent variable in relation to one or more
explanatory variables, QR looks at the entire (probability) distribution of a random
variable by dividing the distribution into various segments, such as deciles, quartiles,
and percentiles. In skewed distributions or in distribution with several outliers, it
may be better to estimate the median of the distribution rather than the mean, for
the latter may be affected by outlying or extreme observations. In this chapter, I show
how QR estimates various quantiles and some of the merits of examining the whole
distribution. As a concrete example, we revisit the wage data and related variables
discussed in Chapter 1.
Chapter 21 on multivariate regression models (MRM) is also new to this edition.
MRMs are useful in situations in which we have more than one dependent variable
but each dependent variable has the same explanatory variables. An example is the
scholastic aptitude test (SAT) ,which most high school students in the US take. It has
two components: verbal and quantitative skills. One can estimate an OLS regression
of the test score on each skill separately, but it may be advantageous to estimate them
jointly, for the variables that affect each test scores are the same. It is thus quite likely
that the scores on the two tests are correlated. Therefore, joint estimation of the two
scores that takes into account the possible correlation between them will produce
estimators that are more efficient than if they are estimated separately by OLS.
However, if the errors are not correlated, joint estimation has no advantage over OLS
estimation of each equation singly.
A broader class of MRM is the seemingly unrelated regressions equations (SURE).
A classic example is the investment functions of several different companies in the
same industry group. Since these companies face a common regulatory atmosphere,
the investment decisions made by the individual companies may be estimated more
efficiently if we estimate them jointly rather than estimating each equation singly,
because it is quite likely that the error terms in individual regressions are correlated.
Note that, unlike the SAT example, in which the same individual takes both the
verbal and quantitative part of the SAT examination, in SURE that is not the case. In
XVI PREFACE

addition, in SURE the explanatory variables may be different for different companies.
Interestingly, if each company has identical explanatory variables, each taking identi-
cal values across every company, SURE estimates will be identical to those obtained
by estimating an OLS regression for each company individually. Also, if the error
terms across equations are not correlated, joint estimations of the equations has no
advantage over individual OLS estimation of each equation.

Companion website
The book’s companion website can be found at www.palgrave.com/companion/
gujarati-econometrics-by-example-2e/ and includes sources for both students and
instructors.
For the student, there are chapter summaries and conclusions, and all data sets in
Excel and Stata formats. Students are encouraged to use these data in several end-of-
chapter exercises to practice applying what they have learned to different scenarios.
A password-protected lecturers’ zone includes a collection of PowerPoint pre-
sentations that correspond to each chapter, and a Solution Manual with solutions to
all the end-of-chapter exercises. Because of their specialized nature, I have put two
additional chapters on the book’s website for those lecturers who wish to use them in
teaching: Chapter 22, Elements of hierarchical linear regression models, also known
as multilevel linear regression analysis (MLR), and Chapter 23, Bootstrapping: learn-
ing from the sample.

Hierarchical linear regression models

The primary objective of MLR is to predict the values of some dependent variable
as a function of explanatory variables at more than one level. A frequently studied
example is a child’s score on a standardized reading examination. It is influenced by
the characteristics of the child (e.g. the amount of study time) as well as features of
the child’s classroom (e.g. class size). This is a two-level analysis. If we include the
type of school, parochial or non-parochial, in the analysis, it would be a three-level
analysis. The actual level at which the analysis is done depends on the type of the
problem studied, availability of the data and computing facilities. As you can imag-
ine, the analysis becomes quickly more complex if we study a problem at many levels.
The point of this example is that we must consider the context in which the anal-
ysis is done. That is why MLR models are also known as contextual models. The
standard classical linear regression model is not adequate to deal with such multilev-
el analyses. The chapter on MLR explains the reasons for this and shows how such
multilevel regression models are estimated and interpreted.

Bootstrapping
In the classical linear regression model with the added assumption that the regression
error term is normally distributed we were able to estimate the parameters of the mod-
el, estimate their standard errors and establish confidence interval for the true param-
eter values. But what happens if the normality assumption is not valid or we have a
sample whose true population is unknown to us? In the chapter on bootstrapping, we
show how we can obtain the estimators of the parameters of interest, their standard
errors and the confidence intervals based on the computed standard errors.
 ACKNOWLEDGEMENTS

In preparing the second edition of Econometrics by Example, I have received invalu-

able help from Inas Kelly, Associate Professor of Economics, Queens College of
the City University of New York, and Professor Michael Grossman, Distinguished
Professor of Economics at the Graduate Center of the City University of New York.
I am indebted to them. I am also grateful to the following reviewers for their very
helpful comments and suggestions.

Reviewers of the first edition:

◆ Professor Michael P. Clements, University of Warwick
◆ Professor Brendan McCabe, University of Liverpool
◆ Professor Timothy Park, University of Georgia
◆ Professor Douglas G. Steigerwald, University of California Santa Barbara
◆ Associate Professor Heino Bohn Nielsen, University of Copenhagen
◆ Assistant Professor Pedro André Cerqueira, University of Coimbra
◆ Doctor Peter Moffatt, University of East Anglia
◆ Doctor Jiajing (Jane) Sun, University of Liverpool

Reviewers of the second edition:

◆ Professor Genaro Sucarrat, Norwegian Business School
◆ Doctor Jouni Sohkanen, University of St. Andrews
◆ Doctor Jin Suk Park, Durham University
◆ Professor Linus Yamane, Pitzer College
◆ Professor Doctor Horst Rottman, University of Applied Sciences Amberg Weiden
◆ Associate Professor Paul Solano, University of Delaware
◆ Professor Anh Nguyen, Ichec Brussels Management School
◆ Professor Frank J. Fabozzi, EDHEC Business School
◆ Professor Robert Duval, University of West Virginia
◆ Professor Robert Bickel, Marshall University
◆ Professor Nicholas Stratis, Florida State University
◆ Professor Giovanni Urga, Cass Business School and Bergamo University
XVIII ACKNOWLEDGEMENTS

and to the other anonymous reviewers whose comments were invaluable. Of course,
I alone am responsible for any errors that remain.
I am grateful to Jaime Marshall, Managing Director at Palgrave Macmillan Higher
Education for initiating this book and to Lauren Zimmerman, Development Editor
at Palgrave Macmillan, for her very constructive suggestions and for her meticulous
attention to detail in the preparation of the second edition. In addition, I am thankful
to Aléta Bezuidenhout and Amy Grant for their behind-the-scenes help.

The author and publishers are grateful to the following for kindly granting their
permission:
◆ Doctor Laurits R. Christensen and Doctor Douglas W. Caves for Table 21.6
Estimate of SURE airlines cost functions.
◆ Doctor Singfat Chu for Table 3.20 Diamond pricing.
◆ Professor Philip Cook for Table 17.11 The effect of beer tax on beer sales in 50 US
states and Washington DC, 1985–2000.
◆ Elsevier for Table 19.15 David Card’s OLS and IV wage regressions.
◆ Professor Ray Fair for Table 11.7 Data on extramarital affairs.
◆ Professor Philip Hans Franses, Professor Christiaan Heij, and Oxford University
Press for Table 8.13 Direct marketing of investment product.
◆ Edward W. Frees for Table 17.1 Charitable giving.
◆ Professor Jeremy Freese, Professor J. Scott Long and Stata Press for Table 12.7
Productivity of scholars.
◆ Professor James W. Hardin, Professor Joseph M. Hilbe and Stata Press for Table
8.12 Heart attack within 48 hours of myocardial infarction onset.
◆ John Wiley & Sons for: Table 7.22 Family planning, social setting, and decline in
birth rate in 20 Latin American countries, 1965–1975; the data used in Exercise
8.8; Table 8.9 The number of coupons redeemed and the price discount; Table
12.1 Data on R&D expenditure for 181 firms.
◆ Professor Leo Kahane for Table 5.1 Data on abortion rates in 50 US states for 1992.
◆ McGraw-Hill for the data used in Exercise 12.5.
◆ Professor Michael J. Kahn for Table 1.5 Data on 654 Boston youth.
◆ MIT Press for: Table 8.1 Data on smoking and other variables; Table 18.1
Modeling recidivism.
◆ Professor Tom Mroz for Table 4.4/Table 11.1 Married women’s hours of work and
related data.
◆ Professor Alicia Munnell for Table 17.9 Role of public investment in productivity
growth in 48 US states.
◆ NORC at the University of Chicago for the General Society Survey data used in
Exercise 9.1.
◆ Norton Company for Table 7.8 Consumption of cigarettes and death from lung
cancer.
◆ Professor Alan Reifman for Table 8.14 President Clinton’s impeachment trial.
 ACKNOWLEDGEMENTS XIX

◆ Professor Germán Rodríguez for the data used in Exercise 9.3.

◆ Sage Publications for the results reproduced in Exercise 8.8.
◆ Professor Allen L. Shoemaker for Table 3.21 Body temperature and heart rate.
◆ Professor C. F. Sirman, J. Shilling, U. Dhillon and John Wiley & Sons for Table 8.10
Fixed vs. adjustable rate mortgages.
I
◆ Standard and Poor for Table 10.8 Data on credit ratings of 92 US companies.
◆ Stata Press for Figure 19.1.
◆ Thomson Reuters DataStream for Table 2.15 CAPM of the UK stock market.
◆ Transparency.org and the World Bank for Table 2.18 GDP and corruption index.
◆ The UCLA IDRE Statistical Consulting Group for: Table 8.11 Admission to gradu-
ate school; Table 9.9 High school students’ curriculum choice; Table 12.8 Poisson
model of student absenteeism.
◆ The World Bank for Table 2.19 Fertility and related data for 64 countries.
 A PERSONAL MESSAGE FROM
THE AUTHOR

Dear student,
First, I am thankful to the students and teachers who used the first edition of
Econometrics by Example (EBE). Encouraged by their helpful comments and
suggestions, I have now written the second edition. It retains the user-friendly and
example-oriented approach to econometrics of the first edition. The changes I have
incorporated in this edition relate to some expository refinements of the topics cov-
ered in the first edition. I have added two new chapters in this edition and have put
two additional chapters on the book’s website. I have added several data-based new
exercises to the new edition.
As noted in the first edition, econometrics is no longer confined to economics
departments. Econometric techniques are used in a variety of fields, such as finance,
law, political science, international relations, sociology, psychology, medicine, and
agricultural science. Some techniques specifically developed for solving economic
problems have now found use in several of these disciplines. Newer econometric
techniques to address specific economic situations and refinements of old econo-
metric techniques are what keep the econometrics field an active field of study.
Students who acquire a thorough grounding in econometrics have a head start in
making careers in these areas. Major corporations, banks, brokerage houses, gov-
ernments at all levels, and international organizations like the IMF and the World
Bank employ a vast number of people who can use econometrics to estimate demand
functions and cost functions, and to conduct economic forecasting of key national
and international economic variables. There is also a great demand for econometri-
cians by colleges and universities all over the world.
There are now several textbooks that discuss econometrics from very elementary
to very advanced levels to help you along the way. I have contributed to this growing
industry with two introductory and intermediate level texts and this third book based
on a clear need for a new approach. Having taught econometrics for several years at
both undergraduate and graduate levels in Australia, India, Singapore, the USA, and
the UK, I came to realize that there was clearly a need for a book that explains this
often-complex discipline in straightforward, practical terms by considering several
interesting examples, such as charitable giving, fashion sales, pricing of diamond
stones, and exchange rates, in depth. This need has now been met with Econometrics
by Example.
What has made econometrics even more exciting to study these days is the
availability of user-friendly software packages. Although there are several software
packages, in this book I primarily use Eviews and Stata, as they are widely available
 A PERSONAL MESSAGE FROM THE AUTHOR XXI

and easy to get started with. Student versions of these packages are available at rea-
sonable cost and I have presented outputs from them throughout the book so you
can see the results of the analysis very clearly.
I have also made this text easy to navigate by dividing it into five parts, which are
described in detail in the Preface. Each chapter follows a similar structure, ending
with a summary and conclusions section to draw together the main points in an I
easy-to-remember format. I have put the data sets used in the examples in the book
up on the companion website, which you can find at www.palgrave.com/compan-
ion/gujarati-econometrics-by-example-2e/. Several data archives maintained by
academic journals and universities provide researchers a vast amount of data for
further research.
I hope you enjoy my hands-on approach to learning and that this textbook will be
a valuable companion to your further education in economics and related disciplines
and your future career.
I would welcome any feedback on the text; please contact me via my email address
on the companion website. Such feedback is extremely valuable to me in planning
future editions of this book.
 LIST OF TABLES

Tables marked with an * are available on the companion website: www.palgrave.com/companion/

gujarati-econometrics-by-example-2e/
Table 1.1 Wages and related data*
Table 1.2 Wage regression 15
Table 1.3 Stata output of the wage function 17
Table 1.4 The AOV table 17
Table 1.5 Data on 654 Boston youth*

Table 2.1 Production data for the USA, 2005*

Table 2.2 Cobb–Douglas function for USA, 2005 30
Table 2.3 Linear production function 31
Table 2.4 Cobb–Douglas production function with linear restriction 33
Table 2.5 Data on real GDP USA, 1960–2007*
Table 2.6 Rate of growth of real GDP, USA 1960–2007 35
Table 2.7 Trend in real US GDP, 1960–2007 36
Table 2.8 Food expenditure and total expenditure for 869 US households in 1995*
Table 2.9 Lin-log model of expenditure on food 38
Table 2.10 Reciprocal model of food expenditure 39
Table 2.11 Polynomial model of US GDP, 1960–2007 41
Table 2.12 Polynomial model of log US GDP, 1960–2007 42
Table 2.13 Summary of functional forms 43
Table 2.14 Linear production function using standardized variables 45
Table 2.15 CAPM of the UK stock market, monthly data for 1980–1999*
Table 2.16 Market model of the UK stock market 48
Table 2.17 The market model with intercept 48
Table 2.18 GDP and corruption index*
Table 2.19 Fertility and related data for 64 countries*

Table 3.1 A model of wage determination 54

Table 3.2 Wage function with interactive dummies 56
Table 3.3 Wage function with differential intercept and slope dummies 57
Table 3.4 Reduced wage function 58
Table 3.5 Semi-log model of wages 61
Table 3.6 Gross private investment and gross private savings, USA, 1959–2007*
Table 3.7 Regression of GPI on GPS, 1959–2007 62
Table 3.8 Regression of GPI on GPS with 1981 recession dummy 63
 LIST OF TABLES XXIII

Table 3.9 Regression of GPI on GPS with interactive dummy 63

Table 3.10 Quarterly retail fashion sales 1986-I–1992-IV*
Table 3.11 Results of regression (3.10) 65
Table 3.12 Sales, forecast sales, residuals, and seasonally adjusted sales 67
Table 3.13 Expanded model of fashion sales 68
Table 3.14 Actual sales, forecast sales, residuals, and seasonally adjusted sales 69 I
Table 3.15 Fashion sales regression with differential intercept and slope dummies 70
Table 3.16 Hypothetical data on production lot size and average cost (AC,$) 72
Table 3.17 Relationship between average cost and lot size 72
Table 3.18 Lot size and average cost relationship disregarding the threshold value 73
Table 3.19 Effects of ban and sugar consumption on diabetes*
Table 3.20 Diamond pricing*
Table 3.21 Body temperature, gender, and heart rate*
Table 3.22 A sample of 528 wage earners*

Table 4.1 The effect of increasing r23 on the variance of OLS estimator b2 82
Table 4.2 Hypothetical data on expenditure, income, and wealth for 10 consumers 83
Table 4.3 Regression results (t values in parentheses) 83
Table 4.4 Mroz data on married women’s hours of work*
Table 4.5 Women’s hours worked regression 85
Table 4.6 The VIF and TOL factors 87
Table 4.7 Revised women’s hours worked regression 88
Table 4.8 VIF and TOL for coefficients in Table 4.7 89
Table 4.9 Principal components of the hours-worked example 90
Table 4.10 Principal components regression 91
Table 4.11 Manpower needs of the US Navy*
Table 4.12 Data on blood pressure and related variables for 20 patients*
Table 4.13 Longley classic data*

Table 5.1 Data on abortion rates in the 50 US states for 1992*

Table 5.2 OLS estimation of the abortion rate function 98
Table 5.3 The Breusch–Pagan test of heteroscedasticity 101
Table 5.4 Abridged White test 103
Table 5.5 Transformed Eq. (5.1) 104
Table 5.6 Logarithmic regression of the abortion rate 105
Table 5.7 Robust standard errors of the abortion rate regression 106
Table 5.8 Heteroscedasticity-corrected robust standard errors of the wage function 109
Table 5.9 Heteroscedasticity-corrected robust standard errors of the hours function 109
Table 5.10 GDP growth rate and related data for 106 countries*
Table 5.11 Data for 455 US manufacturing industries, 1994*

Table 6.1 US consumption function, 1947–2000*

Table 6.2 Regression results of the consumption function 114
Table 6.3 BG test of autocorrelation of the consumption function 120
Table 6.4 First difference transform of the consumption function 122
Table 6.5 Transformed consumption function using = 0.3246 124
Table 6.6 HAC standard errors of the consumption function 125
Table 6.7 Autoregressive consumption function 126
XXIV LIST OF TABLES

Table 6.8 BG test of autocorrelation for autoregressive consumption function 127

Table 6.9 HAC standard errors of the autoregressive consumption function 128
Table 6.10 Housing starts and related data for USA, 1973–2011*

Table 7.1 Determinants of hourly wage rate 133

Table 7.2 Expanded wage function 133
Table 7.3 Refinement of the wage model 134
Table 7.4 RESET test of the wage model 136
Table 7.5 The LM test of the wage model 137
Table 7.6 Regression of experience on age 139
Table 7.7 Determinants of log of wages 140
Table 7.8 Consumption of cigarettes and death rate from lung cancer in 11 countries 143
Table 7.9 Deaths from lung cancer and consumption of cigarettes (all countries) 143
Table 7.10 Deaths from lung cancer and consumption of cigarettes (USA excluded) 144
Table 7.11 Calculated p-value equivalents to true alpha levels at given sample sizes 146
Table 7.12 Aggregate consumption function for the USA, 1960–2009*
Table 7.13 Reduced form regression of PCE on GDPI 151
Table 7.14 Reduced form regression of income on GDPI 151
Table 7.15 OLS results of the regression of PCE on income 152
Table 7.16 OLS results of regression (7.22) 157
Table 7.17 Results of regression with robust standard errors 157
Table 7.18 The results of regression (7.23) using HAC standard errors 158
Table 7.19 OLS estimates of model (7.26) 161
Table 7.20 OLS estimates of model (7.26) with HAC standard errors 161
Table 7.21 Cigarette smoking and deaths from various types of cancer in 43 US states and
Washington, DC, 1960*
Table 7.22 Family planning, social setting, and decline in birth rate in 20 Latin American
countries, 1965–1975 165

Table 8.1 Data on smoking and other variables*

Table 8.2 LPM model of to smoke or not to smoke 171
Table 8.3 Logit model of to smoke or not to smoke 176
Table 8.4 The effect of a unit change in the mean value of the explanatory variables on the
probability of smoking 178
Table 8.5 The logit model of smoking with interaction 179
Table 8.6 Odds ratios for smoking versus non-smoking 181
Table 8.7 Probit model of smoking 182
Table 8.8 The probit model of smoking with interaction 183
Table 8.9 The number of coupons redeemed and the price discount 185
Table 8.10 Fixed vs. adjustable rate mortgages*
Table 8.11 Admission to graduate school*
Table 8.12 Heart attack within 48 hours of myocardial infarction onset*
Table 8.13 Direct marketing of an investment product*
Table 8.14 President Clinton’s impeachment trial*

Table 9.1 Data on school choice*

Table 9.2 Multinomial logistic model of school choice 195
Table 9.3 Raw data for mode of travel*
Another Random Scribd Document
with Unrelated Content
 CHAPTER XVIII.
TRAMP PHILOSOPHY

“What are you two giggling about?” asked a sudden voice, and
Berty, looking up from the hall, and Tom, from the staircase, saw
Bonny standing on the steps above them.
“Meow, meow,” murmured Tom, in a scarcely audible voice.
“What’s up with him, Berty?” asked Bonny, good-naturedly.
“I think his head must be growing weak,” said the girl. “Everything
lately seems to amuse him. If you hold up a finger, he goes into fits
of laughter.”
“Poor Tom,” said Bonny, “and once he was a joy to his friends—I
say, old man, uncurl yourself and tell us the joke.”
“Go ’way, Berty,” ejaculated Tom, partly straightening himself, “go
’way. You hate to see me laugh. Just like all girls. They haven’t any
more sense of humour than sticks.”
“Bonny,” said Berty, turning to her brother, “how is Grandma?”
“Asleep, and resting quietly.”
“I’ll go sit beside her,” said the girl; then, turning to her visitor,
“Tom Everest, are you going to do that commission for me, or are
you not? I’ve stood a good deal from you to-night. Just one word
more, and I take it from you and give it to Bonny.”
“I’m ready and willing if it’s anything good,” said the light-haired
boy.
“Sha’n’t have it, Bonny,” said Tom, staggering to his feet. “That
jewel is mine. I’ll love and cherish him, Berty, until to-morrow
afternoon, then I’ll report to you.”
 “Good night, then,” said Berty, “and don’t make a noise, or you’ll
wake Grandma.”
“Come on, Bonny, let’s interview Berty’s treasure,” exclaimed Tom,
seizing his hat.
“What is it?” inquired Bonny, curiously, following him through the
hall.
“A black pearl. Didn’t she tell you?”
“No, I haven’t been here long. We were busy at the works.”
Without speaking, Tom led the way down the back staircase,
through the lower hall, and out to the wood-shed at the back of the
house.
“Listen to it,” he said to Bonny, with his hand on the door-knob.
“Who is snoring in there?” said the boy, quickly.
“One of your sister’s bits of driftwood. I’ve got to haul this one
into port.”
“I wish Berty would look out for number one, and let number two,
and three, and four, and five, take care of themselves,” said the lad,
irritably. Then he suddenly recollected himself. “I suppose I am a
brute, but I do hate dirty people. Berty is an angel compared with
me.”
“Hello,” said Tom, opening the door and scratching a match to
light the candle in a lantern hanging near him.
There was no response. Tom held the lantern and pushed the
sleeping man with his foot.
“Here, you—wake up.”
The man rolled over, blinking at them in the light. “Hello, comrade,
what you want?”
“Get up,” said Tom, commandingly.
“What for?” asked the sleeper, yawningly.
 “To get out of this. I’ll find you another sleeping-place.”
“Oh, come, comrade,” said the man, remonstratingly, “this is
cruelty to animals. I was having the sleep of my life—like drugged
sleep—takes me back to my boyhood. Move on, and let me begin
again. Your diamonds are safe to-night. I’ve had a first-class supper,
and I’m having a first-class sleep. I wouldn’t get up to finger the
jewels of the Emperor of Russia.”
“Get up,” said Tom, inexorably.
“Let him stay,” said Bonny. “I’m going to be here all night. If he
gets dangerous, I’ll take the poker.”
“Oh, you’re going to stay all night,” remarked Tom. “Very good,
then. I’ll come early in the morning and get him out of this.”
“Talking about me, gentlemen?” asked the man, sleepily.
Tom and Bonny stared at him.
“I haven’t done anything bad yet,” said the tramp, meekly, “unless
I may have corrupted a few of those guinea-pigs by using bad
language. They’re the most inquisitive creatures I ever saw. Stuck
their noses in my food, and most took it away from me.”
“Who are you?” asked Bonny, abruptly.
“A poor, broken-down sailor, sir,” whined the man. “Turned out of
his vessel the first day in port, because he had a little weakness of
the heart.”
“I heard you were a doctor,” interposed Tom.
“So I was this afternoon, sir. That nice young lady said I looked
like a sailor, so I thought I’d be one to please her.”
“You’re a first-class liar, anyway,” said Tom.
The man rolled over on his back and sleepily blinked at him. “That
I am, sir. If you’d hear the different stories I tell to charitable ladies,
you’d fall down in a fit. They’re too funny for words.”
 Bonny was staring at him with wide-open eyes. He had never
spoken to a tramp before in his life. If he saw one on the right side
of the street, he immediately crossed to the left.
“I say,” he began, with a fastidious curl of his lip, “it must be
mighty queer not to know in the morning where you are going to lay
your head at night. Queer, and mighty uncomfortable.”
“So it is, young man, till you get used to it,” responded the tramp,
amiably.
Bonny’s countenance expressed the utmost disdain, and suddenly
the tramp raised himself on an elbow. “Can you think of me, my fine
lad, young and clean and as good-looking as you are?”
“No, I can’t,” said Bonny, frankly.
“Fussy about my tailor,” continued the man. “Good heavens, just
think of it—I, bothering about the cut of my coat. But I was, and I
did, and I’ve come down to be a trailer over the roads.”
“How can persons take a jump like that?” said the boy, musingly.
“It isn’t a jump,” pursued the tramp, lazily, “it’s a slide. You move a
few inches each day. I’m something of a philosopher, and I often
look back on my career. I’ve lots of time to think, as you may
imagine. Now, gentlemen, you wouldn’t imagine where my slide into
trampdom began.”
“You didn’t start from the gutter, anyway,” remarked Bonny, “for
you talk like a gentleman.”
“You’re right, young man. I can talk the slang of the road. I’ve
been broken to it, but I won’t waste it on you, for you wouldn’t
understand it—well, my first push downward was given me by my
mother.”
“Your mother?” echoed Bonny, in disgust.
“Yes, young sir—one of the best women that ever lived. She held
me out to the devil, when she allowed me to kick the cat because it
had made me fall.”
 “Nonsense,” said Bonny, sharply.
“Not nonsense, but sound sense, sir. That was the beginning of
the lack of self-restraint. Did I want her best cap to tear to ribbons?
I got it.”
“Oh, get out,” interposed Tom, crossly. “You needn’t tell us that all
spoiled children go to the bad.”
“Good London, no,” said the man, with a laugh. “Look at our
millionaires. Could you find on the face of the earth a more absolute
autocrat, a more heartless, up-to-date, determined-to-have-his-own-
way, let-the-rest-of-you-go-to-the-dogs kind of a man, than the
average American millionaire?”
The two young men eyed each other, and Bonny murmured, “You
are an extremist.”
“It began away back,” continued the tramp, now thoroughly
roused from his sleepy condition. “When our forefathers came from
England, they brought that ugly, I’m-going-to-have-my-own-way
spirit with them. Talk about the severity of England precipitating the
Revolution. If they hadn’t made a revolution for us, we’d made one
to order. Did you ever read about the levelling spirit of those days? I
tell you this American nation is queer—it’s harder for a real, true
blue son of the soil to keep straight, than it is for the son of any
other nation under the heaven. We lack self-restraint. We’ll go to the
bad if we want to, and none shall hinder us.”
The tramp paused for a minute in his semi-lazy, semi-animated
discourse, and Tom, feeling that some remark was expected from
him, said feebly, “You’re quite a moralizer.”
The tramp did not hear him. “I tell you,” he said, extending a dirty
hand, “we’re the biggest, grandest, foolishest people on earth. We’re
the nation of the future. We’ll govern the earth, and at the same
time fail in governing ourselves. Look at the lynchings we have. The
United States has the highest murder rate of any civilized country in
the world. The average American will be a decent, moral, pay-his-
bills sort of man, and yet he’ll have more tolerance for personal
violence than a Turk has.”
“You’re a queer man,” said Bonny, musingly.
“We’ve got to have more law and order,” pursued the tramp. “The
mothers have got to make their little ones eat their mush, or
porridge, as they say over the line in Canada—not fling it out the
window to the dogs. I tell you that’s where it begins, just where
every good and bad thing begins—in the cradle. The average mother
has too much respect for the squallings of her Young America. Let
her spank him once in awhile, and keep him out of sight of the
eagle.”
“Do you suppose,” said Bonny, solemnly, “that if you had been well
spanked you would not be lying here?”
“Suppose,” repeated the tramp, leaning back, “I don’t suppose
anything about it. I know it. If my mother and father had made me
mind them, and kept me in nights, and trained me into decent, self-
respecting manhood, I’d be standing beside you to-night, young sirs,
beside you—beyond you—for I guess from your bearing you are only
young men of average ability, and I tell you I was a power, when I’d
study and let the drink alone.”
“You must have had a strange mother,” remarked Bonny.
The tramp suddenly raised himself again, and his sunburnt face
grew redder. “For the love of Heaven,” he said, extending one
ragged arm, “don’t say a word against her. The thought of her is the
only thing that moves me. She loved me, and, unclean, characterless
wretch that I am, she would love me yet if she were still alive.”
The man’s head sank on his arm, but not quickly enough. Tom and
Bonny had both seen glistening in his eyes, not the one jewel they
were jestingly in search of, but two priceless jewels that were not
pearls, but diamonds.
“Come on, Bonny,” said Tom, roughly, as he drew him from the
shed.
 “Tom,” remarked Bonny, softly, as they went slowly up-stairs,
“Berty wants you to do something for that fellow, doesn’t she?”
“Yes.”
“Do you think it is of any use?”
“No.”
“Are you going to try?”
“Yes.”
Bonny made no further remarks until some time later, when they
were standing on the front door-step, then he asked, thoughtfully,
“What does Berty want you to do, Tom?”
“Start a cat-farm.”
“A cat-farm! What kind of cats?”
“Gutter cats, back yard cats, disreputable cats, I should guess
from the character of the superintendent she has chosen,” replied
Tom, gruffly.
“The superintendent being the tramp,” said Bonny, slyly.
“There’s no one else in question,” responded Tom.
“I think you are wrong about the nature of the beasts,” continued
Bonny. “I believe Berty means pet cats—Angoras, and so on.”
“What sort are they?”
“Do you mean to say you haven’t noticed them? It’s the latest cry
among the women—‘Give me a long-haired cat!’ Mrs. Darley-James
has a beauty—snow-white with blue eyes.”
“All nonsense—these society women don’t know what to do to kill
time.”
“They’re not all society women that have them. Old Mrs. McCarthy
has a pair of dandies—and I find that the women who take up cat-
culture are more kind to back yard tabbies.”
 “Maybe you’re right, Bonny. I don’t call round on these women as
you do.”
“Well,” said Bonny, apologetically, “I don’t see any harm in putting
on your best coat and hat, and doing a woman who has invited you
to her house the compliment of calling on her day.”
“Oh, dressing up,” said Tom, “is such a nuisance.”
“You can’t call on many that you’d be bothered with calling on
without it. Sydney Gray tried calling on Margaretta on her day in a
bicycle suit. He had ridden fifty miles, and was hot and dusty and
perspiring. He had the impudence to go into Margaretta’s spick and
span rooms and ask for a cup of tea. She was so sweet to him that
he came away hugging himself—but he never got asked there again,
and every once in awhile he says to some one, ‘Queer, isn’t it, that
Mrs. Stanisfield gives me the go-by. I don’t know what I’ve done to
offend her.’”
“Suppose we come back to Berty,” observed Tom. “If all the
women here have cats, what does she want to start a farm for?”
“The women aren’t all supplied. The demand is increasing, and
many would buy here that wouldn’t send away for one. Berty is
more shrewd than you think. These cats sell for five and six dollars
apiece at the least, and some are as high as twenty. I shouldn’t a bit
wonder if it would turn out to be a good business speculation.”
“Well, then, you just meet some of the fellows in my office to-
morrow evening and arrange for a house and lot for this man who is
to boss the cats,” said Tom, dryly.
“All right, I’ll come—maybe Roger will, too.”
“Good night,” said Tom, “I’m off.”
“Good night,” returned Bonny, laconically, and, standing with his
hands thrust in his pockets, he was looking down the street, when
Tom suddenly turned back.
 “I say, Bonny, your grandmother must have a good history of the
Revolution.”
“She has two or three.”
“Ask her to lend me one, will you? I half forget what I learned in
school.”
“Yes, sir; I’ll bring it to-morrow.”
Tom really went this time, and as he quickly disappeared from
sight, Bonny, from his station on the door-step, kept muttering to
himself, “Slipping through life, slipping through life. How easy to get
on that greased path!”
“What are you saying to yourself?” asked a brisk voice.
Bonny, turning sharply, found Berty beside him.
“Nothing much—only that I was hungry. Let’s see what’s in the
pantry.”
“Bonny, if I show you where there is a pie, the most beautiful
pumpkin pie you ever saw, will you help me with my tramp?”
“I’ll do it for half a pie,” said Bonny, generously. “Come on, you
young monkey.”
 CHAPTER XIX.
AT THE BOARD OF WATER-WORKS

“There she comes,” murmured one of the clerks, in the board of

water-works offices.
“Who?” murmured the other clerk.
“The beggar-girl,” responded the first one.
The chairman of the board heard them, and looked fearfully over
his shoulder.
Roger, Tom, and Bonny knew that Berty’s frequent visits to the city
hall had gained for her a nickname, occasioned by the character of
her visits. She was always urging the claims of the poor, hence she
was classed with them. They carefully shielded from her the
knowledge of this nickname, and supposed she knew nothing of it.
However, she did know. Some whisper of the “beggar-girl” had
reached her ears, and was a matter of chagrin to her.
The chairman of the board of water-works knew all about her. He
knew that if the clerks had seen her passing along the glass corridor
outside his office she was probably coming to him; she probably
wanted something.
One clerk was his nephew, the other his second cousin, so he was
on terms of familiarity with them, and at the present moment was in
the outer office discussing with them the chances that a certain bill
had of passing the city council.
The door of his own inner office stood open, but of what use to
take refuge there? If the beggar-girl really wished to see a man on
business, she always waited for him.
 He looked despairingly about him. A high, old-fashioned desk
stood near. Under it was a foot-stool. As a knock came at the door,
he ungracefully folded his long, lank limbs, quickly sat down on the
foot-stool, and said, in a low voice, “I’ve gone to Portland for a
week!” Then he fearfully awaited results.
Berty, followed by her friend, the mongrel pup, walked into the
room and asked if Mr. Morehall were in.
“No,” said the second cousin, gravely, “he has been called to
Portland on important business—will be gone a week.”
The girl’s face clouded; she stood leaning against the railing that
separated the room into two parts, and, as she did so, her weight
pushed open the gate that the second cousin had just hastily swung
together.
The pup ran in, and being of quick wits and an inquiring
disposition wondered what that man was doing curled up in a corner,
instead of being on his feet like the other two.
He began to sniff round him. Perhaps there was something
peculiar about him. No—he seemed to be like other men, a trifle
anxious and red-faced, perhaps, but still normal. He gave a playful
bark, as if to say, “I dare you to come out.”
Berty heard him, and turned swiftly. “Mugwump, if you worry
another rat, I’ll never give you a walk again.”
The two young men were in a quandary. Whether to go to the
assistance of their chief, or whether to affect indifference, was
vexing their clerical souls. Berty, more quick-witted than the pup,
was prompt to notice their peculiar expressions.
“Please don’t let him worry a rat,” she said, beseechingly, “it
makes him so cruel. Rats have a dreadfully hard time! Oh, please
call him off. He’s got it in his mouth. I hear him.”
The chairman, in his perplexity, had thrown him a glove from his
pocket, and Mugwump was mouthing and chewing it deliciously.
 “He’ll kill it,” exclaimed Berty. “Oh! let me in,” and before the
confused clerks could prevent her, she had pushed open the gate
and had followed the dog.
Her face was a study. Low down on the floor sat the deceiving
chairman, with Mugwump prancing before him.
“Mr. Morehall!” she exclaimed; then she stopped.
The chairman, with a flaming face, unfolded his long limbs,
crawled out of his retreat, stumbled over the dog, partly fell,
recovered himself, and finally got to his feet. After throwing an
indignant glance at the two clerks, who were in a pitiable state of
restrained merriment, he concentrated his attention on Berty. She
blushed, too, as she divined what had been the case.
“You were trying to hide from me,” she said, after a long pause.
He could not deny it, though he stammered something about it
being a warm day, and the lower part of the desk being a cool
retreat.
“Now you are telling me a story,” said Berty, sternly, “you, the
chairman of the board of water-works—a city official, afraid of me!”
He said nothing, and she went on, wistfully, “Am I, then, so
terrible? Do you men all hate the beggar-girl?”
Her three hearers immediately fell into a state of shamefacedness.
“What have I done?” she continued, sadly, “what have I done to
be so disliked?”
No one answered her, and she went on. “When I lived on Grand
Avenue and thought only of amusing myself, everybody liked me.
Why is it that every one hates me since I went to River Street and
am trying to make myself useful?”
To Mr. Morehall’s dismay, her lip was quivering, and big tears
began to roll down her cheeks.
“Come in here,” he said, leading the way to his own room.
 Berty sat down in an armchair and quietly continued to cry, while
Mr. Morehall eyed her with distress and increasing anxiety.
“Have a glass of water, do,” said the tall man, seizing a pitcher
near him, “and don’t feel bad. Upon my word, I didn’t know what I
was doing.”
“It—it isn’t you only,” gasped Berty. “It is everybody. Please excuse
me, but I am tired and worried this morning. I’ve had some sick
friends on our street—that’s what I came to see you about. The
autumn is starting in so dry that we are almost choked with dust.
River Street hasn’t been watered for a week.”
“Hasn’t it?” said Mr. Morehall, slowly.
“Grand Avenue was always watered,” continued Berty, as she
rested her head against the back of the chair, “even soaked. I never
thought about dust in summer. Why is River Street neglected?”
“River Street citizens don’t pay such heavy taxes,” suggested Mr.
Morehall.
“But they pay all they can, sir.”
“Poor people are shiftless,” said the official, with a shrug of his
shoulders.
“That’s what everybody says,” exclaimed Berty, despairingly. “All
well-to-do people that I talk to dismiss the poorer classes in that
way. But poor people aren’t all shiftless.”
“Not all, perhaps,” said Mr. Morehall, amiably, and with inward
rejoicing that Berty was wiping away her tears.
“And there must be poor people,” continued Berty. “We can’t all be
rich. It’s impossible. Who would work for the prosperous, if all were
independent?”
“What I meant,” replied Mr. Morehall, “was that poverty is very
often the result of a lack of personal exertion on the part of the
poor.”
 “Yes, sir, but I am not just now advocating the cause of the
helpless. It is rather the claims of the respectable poor. I know
heaps of people on River Street who have only a pittance to live on.
Their parents had only the same. They are not dissipated. They work
hard and pay what they can to the city. My argument is that these
poorer children of the city should be especially well looked after, just
as in a family the delicate or afflicted child is the most petted.”
“Now you are aiming at the ideal,” said Mr. Morehall, with an
uneasy smile.
“No, sir, not the ideal, but the practical. Some one was telling me
what the city has to spend for prisons, hospitals, and our asylums.
Why, it would pay us a thousandfold better to take care of these
people before they get to be a burden on us.”
“They are so abominably ungrateful,” muttered Mr. Morehall.
“And so would I be,” exclaimed Berty, “if I were always having
charity flung in my face. Let the city give the poor their rights. They
ask no more. It’s no disgrace to be born poor. But if I am a working
girl in River Street I must lodge in a worm-eaten, rat-haunted
tenement-house. I must rise from an unwholesome bed, and put on
badly made, uncomfortable clothing. I must eat a scanty breakfast,
and go to toil in a stuffy, unventilated room. I must come home at
night to my dusty, unwatered street, and then I must, before I go to
sleep, kneel down and thank God that I live in a Christian country—
why, it’s enough to make one a pagan just to think of it! I don’t see
why the poor don’t organize. They are meeker than I would be. It
makes me wild to see River Street neglected. If any street is left
unwatered, it ought to be Grand Avenue rather than River Street, for
the rich have gardens and can go to the country, while the poor
must live on the street in summer.”
“Now you are oppressing the rich,” said Mr. Morehall, promptly.
“Heaven forbid,” said the girl, wearily. “Equal rights for all—”
“The poor have a good friend in you,” he said, with reluctant
admiration.
 “Will you have our street watered, sir?” asked Berty, rising.
“I’ll try to. I’ll have to ask for an appropriation. We’ll want another
cart and horse, and an extra man.”
“That means delay,” said Berty, despairingly, “and in the meantime
the dust blows about in clouds. It enters the windows and settles on
the tables and chairs. It chokes the lungs of consumptives struggling
for breath, and little babies gasping for air. Then the mothers put the
windows down, and they breathe over and over again the polluted
air. And this is stifling autumn weather—come spend a day in River
Street, sir.”
“Miss Gravely,” said the man, with a certain frank bluntness and
good-will, “excuse my plain speaking, but you enthuse too much.
Those poor people aren’t made of the same stuff that you are. They
don’t suffer to the extent that you do under the same conditions.”
Berty was about to leave the room, but she turned round on him
with flashing eyes. “Do you mean to say that God has created two
sets of creatures—one set with fine nerves and sensitive bodies, the
other callous and unsensitive to comfort or discomfort?”
“That’s about the measure of it.”
“And where would you draw the line?” she asked, with assumed
calmness.
Mr. Morehall did not know Berty well. His family, though one of the
highest respectability, moved in another circle. If he had had the
pleasure of an intimate acquaintance with the energetic young
person before him, he would have known that her compressed lips,
her half-closed eyes, and her tense forehead betokened an
overwhelming and suppressed anger.
Therefore, unaware of the drawn sword suspended over his head,
he went on, unsuspiciously. “To tell the truth, I think there’s a lot in
heredity. Now there are some families you never find scrabbling
round for something to eat. I never heard of a poor Gravely, or a
Travers, or a Stanisfield, or a Morehall. It’s in the blood to get on. No
one can down you.”
He paused consequentially, and Berty, biting her lip, waited for
him to go on. However, happening to look at the clock, he stopped
short. This talk was interesting, but he would like to get back to
business.
“Mr. Morehall,” said Berty, in a still voice, “do you know that there
are a legion of poor Traverses up in the northern part of the State,
that Grandma used to send boxes to every month?”
“No,” he said, in surprise, “I never heard that.”
“And old Mr. Stanisfield took two of his own cousins out of the
poorhouse three years ago, and supports them?”
“You astonish me,” murmured the confused man.
“And, moreover,” continued Berty, with a new gleam in her eye,
“since you have been frank with me, I may be frank with you, and
say that two of the people for whom I want River Street made sweet
and wholesome are old Abner Morehall and his wife, from
Cloverdale.”
“Abner Morehall!” exclaimed the man, incredulously.
“Yes, Abner Morehall, your own uncle.”
“But—I didn’t know—why didn’t he tell?—” stammered Mr.
Morehall, confusedly.
“Yes—why do you suppose he didn’t tell you?” said Berty. “That’s
the blood—the better blood than that of paupers. He was ashamed
to have you know of his misfortune.”
“He thought I wouldn’t help him,” burst out her companion, and,
with shame and chagrin in his eyes, he sat down at the table and
put his hand to his head. “It’s those confounded notes,” he said, at
last. “I often told him he ought never to put his name to paper.”
“It was his generosity and kindness—his implicit faith in his fellow
men,” continued Berty, warmly; “and now, Mr. Morehall, can you say
that ‘blood,’ or shrewdness, or anything else, will always keep
misfortune from a certain family? Who is to assure you that your
great-great-grandchildren will not be living on River Street?”
No one could assure the disturbed man that this contingency
might not arise, and, lifting his head, he gazed at Berty as if she
were some bird of ill-omen.
“You will come to see your relatives, I suppose?” she murmured.
He made an assenting gesture with his hand.
“They are two dear old people. They give tone to the street—and
you will send a watering-cart this afternoon?”
He made another assenting gesture. He did not care to talk, and
Berty slipped quietly from his office.
 CHAPTER XX.
SELINA’S WEDDING

Selina Everest and the Mayor were married.

On one of the loveliest of autumn mornings, the somewhat
mature bride had been united in the holy bonds of matrimony to the
somewhat mature bridegroom, and now, in the old family mansion
of the Everests, they were receiving the congratulations of their
numerous friends. Selina had had a church wedding. That she
insisted on, greatly to the distress and confusion of her modest
husband. He had walked up the aisle of the church as if to his
hanging. One minute he went from red to purple, from purple to
violent perspiration, the next he became as if wrapped in an ice-cold
sheet, and not until then could he recover himself.
But now it was all over. This congratulatory business was nothing
compared to the agonizing experience of being in a crowded church,
the shrinking target for hundreds of criticizing, shining, awful eyes.
Yes, he was in an ecstasy to think the ordeal was over. Selina
never would have made him go through it, if she had had the
faintest conception of what his sufferings would be.
She had enjoyed it. All women enjoy that sort of thing. They are
not awkward. How can they be, with their sweeping veils and trailing
robes? He had felt like a fence-post, a rail—anything stiff, and ugly,
and uncomfortable, and in his heart of hearts he wondered that all
those well-dressed men and women had not burst into shouts of
laughter at him.
Well, it was over—over, thank fortune. He never had been so glad
to escape from anything in his life, as he had been to get out of the
church and away from the crowd of people. That alone made him
blissfully happy, and then, in addition, he had Selina.
He looked at her, and mechanically stretched out a hand to an
advancing guest. Selina was his now. He not only was out of that
church and never would have to go into it again for such a purpose
as he had gone this morning, but Selina Everest was Mrs. Peter
Jimson.
He smiled an alarming smile at her, a smile so extraordinarily
comprehensive, that she hurriedly asked under her breath if he were
ill.
“No,” he said, and, in so saying, clasped the hand of the advancing
friend with such vigour, that the unhappy man retreated swiftly with
his unspoken congratulations on his lips.
“I’m not ill,” he muttered. “I’m only a little flustered, Selina.”
“Here’s Mrs. Short,” she said, hastily, “be nice to her. She’s a
particular friend of mine.”
“A fine day, ma’am,” murmured the Mayor; “yes, the crops seem
good—ought to have rain, though.”
Over by a French window opening on the lawn, Berty and Tom
were watching the people and making comments.
“Always get mixed up about a bride and groom,” volunteered Tom.
“Always want to congratulate her, and hope that he’ll be happy. It’s
the other way, isn’t it?”
“I suppose so,” murmured Berty. “Oh, isn’t it a dream to think that
they’re both happy?”
“Makes one feel like getting married oneself,” said Tom.
“Yes, doesn’t it? A wedding unsettles me. All the rest of the day I
wish I were a bride.”
“Do you?” exclaimed Tom, eagerly.
 “Yes, and then the next day I think what a goose I am. Being
married means slavery to some man. You don’t have your own way
at all.”
“Men never being slaves to their wives,” remarked Tom.
“Men are by nature lordly, overbearing, proud-spirited, self-willed,
tyrannical and provoking,” said Berty, sweepingly.
But Tom’s thoughts had been diverted. “Say, Berty, where do
those Tomkins girls get money to dress that way? They’re visions in
those shining green things.”
“They spend too much of their father’s money on dress,” replied
Berty, severely. “Those satins came from Paris. They are an exquisite
new shade of green. I forget what you call it.”
“I guess old Tomkins is the slave there,” said Tom; then, to avoid
controversy, he went on, hastily, “You look stunning in that white
gown.”
“I thought perhaps Selina would want me for a bridesmaid,” said
Berty, plaintively, “but she didn’t.”
“Too young and foolish,” said Tom, promptly; “but, I say, Berty,
where did you get the gown?”
“Margaretta gave it to me. I was going to wear muslin, but she
said I shouldn’t.”
“What is it anyway?” said Tom, putting out a cautious finger to
touch the soft folds.
“It’s silk, and if you knew how uncomfortable I am in it, you would
pity me.”
“Uncomfortable! You look as cool as a cucumber.”
“I’m not. I wish I had on a serge skirt and a shirt-waist.”
“Let me get you something to eat,” he said, consolingly. “That
going to church and standing about here are tiresome.”
 “Yes, do,” said Berty. “I hadn’t any breakfast, I was in such a hurry
to get ready.”
“Here are sandwiches and coffee to start with,” he said, presently
coming back.
“Thank you—I am so glad Selina didn’t have a sit-down luncheon.
This is much nicer.”
“Isn’t it! You see, she didn’t want speeches. On an occasion like
this, the Mayor would be so apt to get wound up that he would keep
us here till midnight.”
Berty laughed. “And they would have lost their train.”
“There isn’t going to be any train,” said Tom, mysteriously.
“Aren’t they going to New York?”
“No.”
“To Canada?”
“No.”
“To Europe?”
“No—Jimson says he isn’t going to frizzle and fry in big cities in
this lovely weather, unless Selina absolutely commands, and she
doesn’t command, so he’s going to row her up the river to the
Cloverdale Inn.”
Berty put down her cup and saucer and began to laugh.
“Where are those sandwiches?” asked Tom, trying to peer round
the cup.
“Gone,” said Berty, meekly.
He brought her a new supply, then came cake, jellies, sweets, and
fruit in rapid succession.
Berty, standing partly behind a curtain by the open window, kept
her admirer so busy that at last he partly rebelled.
 “‘A RIVER STREET DELEGATION,’ SAID TOM”

“Look here, Berty,” he remarked, firmly, “I don’t want to be

suspicious, but it’s utterly impossible for a girl of your weight and
education to dispose of so much provender at a single standing.
You’re up to some tricks with it. Have you got some River Street rats
with you?”
 “Yes,” she said, smilingly. “Hush, don’t tell,” and, slightly pulling
aside the curtain, she showed him four little heads in a clump of
syringa bushes outside.
“Newsboy Jim, and Johnny-Boy, and the two girls, Biddy Malone
and Glorymaroo, as we call her, from her favourite exclamation,”
continued Berty; “they wanted to see something of the Mayor’s
marriage, and I let them come. I’ve been handing out
‘ruffreshments’ to them. Don’t scold them, Tom.”
“Come right in, youngsters,” said the young man, heartily. “I’m
sure Mr. Jimson is your Mayor as well as ours.”
Without the slightest hesitation, the four grinning children stepped
in, and, marshalled by Tom, trotted across the long room to the
alcove where Selina and the Mayor stood.
“A River Street delegation,” said Tom, presenting them, “come to
offer congratulations to the chief executive officer of the city.”
Selina shook hands with them. The Mayor smiled broadly, patted
their heads, and the other guests, who had been bidden, without an
exception kindly surveyed the unbidden, yet welcome ones.
The introduction over, Tom examined them from head to foot. The
little rats were in their Sunday clothes. Their heads were sleek and
wet from recent washing. There was a strong smell of cheap soap
about them.
“This way, gentlemen and ladies,” he said, and he led them back
to a sofa near Berty. “Sit down there in a row. Here are some foot-
stools for you.
“Waiter,” and he hailed a passing black-coated man, “bring the
best you have to these children, and, children, you eat as you never
ate before.”
Berty stood silently watching him. “Tom Everest,” she remarked,
slowly, “I have two words to say to you.”
“I’d rather have one,” he muttered.
 “Hush,” she said, severely, “and listen. The two words are, ‘Thank
you.’”
“You’re welcome,” returned Tom, “or, as the French say, ‘There is
nothing of what—’ Hello, Bonny, what’s the joke?”
Bonny, in a gentlemanly convulsion of laughter, was turning his
face toward the wall in their direction.
The lad stopped, and while Berty and Tom stood silently admiring
his almost beautiful face, which was just now as rosy as a girl’s, he
grew composed.
“I call you to witness, friends,” he said, slightly upraising one
hand, “that I never in my life before have laughed at dear Grandma.”
“You’ve been cross with her,” said Berty.
“Cross, yes, once or twice, but Grandma isn’t a person to laugh at,
is she?”
“Well, not exactly,” said Berty. “I never saw anything funny about
Grandma.”
“Well, she nearly finished me just now,” said Bonny. “I was
standing near Selina, when gradually there came a break in the
hand-shaking. The guests’ thoughts began to run luncheon-ward.
Grandma was close to the bridal pair, and suddenly Selina turned
and said, impulsively, ‘Mrs. Travers, you have had a great deal of
experience. I want you to give me a motto to start out with on my
wedding-day. Something that will be valuable to me, and will make
me think of you whenever I repeat it.’ The joke of it was that
Grandma didn’t want to give her a motto. She didn’t seem to have
anything handy, but Selina insisted. At last Grandma said, in a shot-
gun way, ‘Don’t nag!’ then she moved off.”
“Selina stared at the Mayor, and the Mayor stared over her
shoulder at me. She didn’t see anything funny in it. We did. At last
she said, meekly, ‘Peter, do you think I am inclined to nag?’
“He just rushed out a sentence at her—‘Upon my life I don’t!’
 “‘Do you, Bonny?’ she asked, turning suddenly round on me.
“‘No, Selina, I don’t,’ I told her, but I couldn’t help laughing.
“Jimson grinned from ear to ear, and I started off, leaving Selina
asking him what he was so amused about.”
Tom began to chuckle, but Berty said, “Well—I don’t see anything
to laugh at.”
“She doesn’t see anything to laugh at,” repeated Bonny, idiotically,
then he drew Tom out on the lawn where she could hear their bursts
of laughter.
Presently the Mayor came strolling over to the low chair where
Berty sat watching her little River Street friends.
“Is it all right for me to leave Selina for a few minutes?” he asked,
in an anxious voice. “I can’t ask her, for she is talking to some one. I
never was married before, and don’t know how to act.”
“Oh, yes,” said Berty, carelessly. “It’s an exploded fancy that a
man must always stay close to his wife in general society. At home
you should be tied to your wife’s apron-strings, but in society she
takes it off.”
“You don’t wear aprons in your set,” said the Mayor, quickly. “I’ve
found that out. You leave them to the maids.”
“I don’t like aprons,” said Berty. “If I want to protect my dress, I
tuck a towel under my belt.”
“You’ve odd ways, and I feel queer in your set,” pursued the
Mayor, in a meditative voice. “Maybe I’ll get used to you, but I don’t
know. Now I used to think that the upper crust of this city would be
mighty formal, but you don’t even say, ‘Yes, ma’am,’ and ‘No,
ma’am,’ to each other. You’re as off-hand as street urchins, and
downright saucy sometimes I’d say.”
“We’re not as formal as our grandparents were,” said Berty,
musingly—“there’s everything in environment. We’re nothing but a
lot of monkeys, anyway—see those children how nicely they are
eating. If they were on River Street, they would drop those knives
and forks, and have those chicken bones in their fingers in a jiffy.”
“Do you ever feel inclined to eat with your fingers?” asked Mr.
Jimson, in a low voice, and looking fearfully about him.
“Often, and I do,” said Berty, promptly. “Always at picnics.”
“My father hated fuss and feathers,” remarked Mr. Jimson. “He
always went round the house with his hat on, and in his shirt-
sleeves.”
“The men on River Street do that,” replied Berty. “I can see some
reason for the shirt-sleeves, but not for the hat.”
“Mr. Jimson,” said Walter Everest, suddenly coming up to him. “It’s
time to go. Selina’s up-stairs changing her gown, the two suit-cases
are in the hall.”
Ten minutes later, Mr. and Mrs. Everest, with their children and
their friends, stood on the front steps calling parting good wishes
after Selina and the Mayor.
There were many speculations as to their destination, the greater
part of the guests imagining a far-away trip, as Berty had done.
“You’re all wrong,” observed Tom. “My boat is at Mrs. Travers’s
wharf for them to go to Cloverdale, and it’s cram jam full of flowers
with bows of white ribbon on each oar.”
Roger Stanisfield burst out laughing. “You’re sold, Tom, my boy,
do you suppose the Mayor would trust a joker like you? He has my
boat.”
Bonny was in an ecstasy. “Get out, you two old fellows,” he
exclaimed, slapping his brother-in-law on the shoulder. “Mr. Jimson is
going to row his beloved up the river in my boat.”
“No, he isn’t,” said Walter Everest. “He’s got mine.”
“I believe he’s fooled us all,” said Tom, ruefully. “Did you have any
flowers in your boat, Stanisfield?”
 “Margaretta put a little bit of rice in,” said Roger, “just a handful,
where no one would see it but themselves.”
“Did you trim your boat, Bonny?” asked Roger.
“Yes,” said the boy, “with old shoes. I had a dandy pair chained to
the seat, so they couldn’t be detached, unless Jimson had a hatchet
along.”
“Whose boat has he got, for the land’s sake?” inquired Walter
Everest. “He’s asked us all, and we’ve all pledged secrecy and good
conduct, and we’ve all broken our word and decorated.”
“He’s got nobody’s boat, my friends,” said old Mr. Everest, who
was shaking with silent laughter. “Don’t you know Peter Jimson
better than to imagine that he would exert himself by rowing up the
river this warm day?”
“Well, what are his means of locomotion?” asked Tom.
“My one-hoss shay, my son. It was waiting round the corner of the
road for him.”
“I say,” ejaculated Tom, “let’s make up a party to call on them to-
morrow. We can take the flowers and other trifles.”
“Hurrah,” said Bonny. “I’ll go ask Margaretta to get up a lunch.”
“Will you go to-morrow, Berty?” asked Tom, seeking her out, and
speaking in a low voice.
“Where?”
He explained to her.
“Yes, if you will tell me why you laughed so much at what
Grandma said to Selina.”
Tom looked puzzled. “It’s mighty hard to explain, for there isn’t
anything hidden in it. It just sounded kind of apt.”
“You men think women talk too much.”
“Some women,” replied Tom, guardedly.
 “You want them to do as the old philosopher said, ‘Speak honey
and look sunny,’ and, ‘The woman that maketh a good pudding in
silence is better than one that maketh a tart reply.’”
“That’s it exactly,” said Tom, with a beaming face. “Now will you
go to-morrow?”
“Probably,” said Berty, with an oracular frown. “If I am not teased
too much.”
“May I come in this evening and see how you feel about it?”
“How long do you plan to stay?”
“Five minutes.”
“Then you may come,” she said, graciously.