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Questions › DSE › DSE 2015 › Q44
2 marks, −0.666666666666667Econometrics › Misspecification and measurement error › Omitted variable biasHardabout 4 min

DSE 2015 Question 44: Misspecification and measurement error

A researcher estimates Model A: yi=β0+β1Si+β2Ai+εiy_i=\beta_0+\beta_1S_i+\beta_2A_i+\varepsilon_iyi​=β0​+β1​Si​+β2​Ai​+εi​ and Model B: yi=β0+β1Si+εiy_i=\beta_0+\beta_1S_i+\varepsilon_iyi​=β0​+β1​Si​+εi​, where SSS is study hours and AAA is ability. β^1=7.1\hat\beta_1=7.1β^​1​=7.1 in A but 2.12.12.1 in B (both significant), and β^2=1.9\hat\beta_2=1.9β^​2​=1.9 (significant). This suggests that

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A researcher estimates Model A: yᵢ=β₀+β₁Sᵢ+β₂Aᵢ+εᵢ and Model B: yᵢ=β₀+β₁Sᵢ+εᵢ, where S is study hours and A is ability. β̂₁=7.1 in A but 2.1 in B (both significant), and β̂₂=1.9 (significant). This suggests that (A) students with lower ability also spend fewer hours studying (B) students with lower ability spend more time studying (C) there is no way that students of even high ability can get more than 40 marks (D) none of the above

Also written as: A researcher estimates Model A: y_i=beta_0+beta_1S_i+beta_2A_i+epsilon_i and Model B: y_i=beta_0+beta_1S_i+epsilon_i, where S is study hours and A is ability. beta_hat_1=7.1 in A but 2.1 in B (both significant), and beta_hat_2=1.9 (significant). This suggests that

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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