DSE 2011 Question 39: Misspecification and measurement error
Instead of estimating a production function y=a0+a1K+a2L+u (where y is output, K is capital input and L is labour input), a researcher estimates y=a0+a1K+u. It is known that in the true model a2>0 and K and L are complements. Which of the following is true?
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Instead of estimating a production function y=a₀+a₁K+a₂L+u (where y is output, K is capital input and L is labour input), a researcher estimates y=a₀+a₁K+u. It is known that in the true model a₂>0 and K and L are complements. Which of the following is true? (A) The estimated a₁ will be upwardly biased. (B) The estimated a₁ will have a downward bias. (C) The estimated a₁ will be biased, but the direction of bias cannot be determined. (D) The estimated a₁ will be unbiased, but a₀ will be biased.
Also written as: Instead of estimating a production function y=a_0+a_1K+a_2L+u (where y is output, K is capital input and L is labour input), a researcher estimates y=a_0+a_1K+u. It is known that in the true model a_2>0 and K and L are complements. Which of the following is true?
Misspecification and measurement error has come up 11 times in 4 exams since 2011.
What this question tests
This question is on Omitted variable bias, part of Misspecification and measurement error in Econometrics.
How leaving out a relevant variable biases the estimates, and in which direction.
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