use a few sentences to answer this question (Q6):
A retail chain store oers a week long management training program to all its store managers
at the end of the second year in their job. Participation in the program is voluntary. The
central management of the chain store is interested in knowing whether participation in the
program makes it more likely that store managers get promoted to more senior management
positions. You have data on all the store managers, their participation in the program, and
whether they have been promoted between years three and ve of being in their job. You run
a regression of a binary variable on the promotion status (Y ) on a constant and a dummy
for participation in the training program (D).
(a) Suppose that central management encourages participation in the training program by
sending a personal letter from the CEO to selected store managers who have been recom-
mended by their supervisors as showing particular potential for a position in higher-level
management. Would it be useful to use the CEO letter as an instrument for participa-
tion in the training program? Write down the instrumental variables model and explain
whether using the CEO letter fullls the validity and relevance conditions of an instru-
ment or not. Explain in detail which condition(s) are violated.
(b) Suppose that central management encourages participation in the training program by
sending a personal letter from the CEO to a randomly chosen set of store managers. Now
compare this CEO letter to the one in (a). Does it fulll the conditions violated by the
letter in (a)?