An analyst estimates by OLS, but the true . By including the irrelevant ,
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2 marks, −0.666666666666667EconometricsMisspecification and measurement errorIrrelevant variables and functional-form misspecificationModerateabout 3 min
DSE 2015 Question 45: Misspecification and measurement error
Answer and worked solution
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Plain-text version
An analyst estimates Y=β₀+β₁X₁+β₂X₂+β₃X₃+u by OLS, but the true β₃=0. By including the irrelevant X₃, (A) there is no harm, as all estimates remain unbiased and efficient (B) all estimates become biased and inconsistent (C) the estimates remain unbiased but have larger standard errors (D) the estimates may be biased but remain efficient
Also written as: An analyst estimates Y=beta_0+beta_1X_1+beta_2X_2+beta_3X_3+u by OLS, but the true beta_3=0. By including the irrelevant X_3,
Misspecification and measurement error has come up 11 times in 4 exams since 2011.
What this question tests
This question is on Irrelevant variables and functional-form misspecification, part of Misspecification and measurement error in Econometrics.
The cost of including a variable that does not belong, and of using the wrong functional form.
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