A researcher investigating the determinants of crime in the United Kingdom has data for
42 police regions over 22 years.She estimates by OLS the following regression

\ln ( \mathrm { cmrt } ) _ { i t } = \alpha _ { i } + \phi _ { t } + \beta _ { 1 } \text { unrtm } _ { i t } + \beta _ { 2 } \text { proyth } _ { i t } + \beta _ { 3 } \ln ( p p ) _ { i t } + u _ { i t } ; i = 1 , \ldots , 42 , t = 1 , \ldots , 22

where

\mathrm { cmrt }

is the crime rate per head of population, unrtm is the unemployment rate of males, proyth is the proportion of youths,

p p

is the probability of punishment measured as (number of convictions)/(number of crimes reported).

\alpha

and

\phi

are area and year fixed effects, where

\alpha _ { i }

equals one for area

i

and is zero otherwise for all

i

, and

\phi _ { t }

is one in year

t

and zero for all other years for

t = 2 , \ldots , 22 . \phi _ { 1 }

is not included. (a) What is the purpose of excluding

\phi _ { 1 }

? What are the terms

\alpha

and

\phi

likely to pick up? Discuss the advantages of using panel data for this type of investigation.

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