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Questions › DSE › DSE 2015 › Q46
2 marks, −0.666666666666667Econometrics › Misspecification and measurement error › Irrelevant variables and functional-form misspecificationModerateabout 3 min

DSE 2015 Question 46: Misspecification and measurement error

Let β^\hat\betaβ^​ be the OLS slope on X1X_1X1​ from regressing YYY on X1X_1X1​ alone, and β~\tilde\betaβ~​ the coefficient on X1X_1X1​ from regressing YYY on X1X_1X1​ and X2X_2X2​. Then

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Let β̂ be the OLS slope on X₁ from regressing Y on X₁ alone, and β̃ the coefficient on X₁ from regressing Y on X₁ and X₂. Then (A) Var(β̂)<Var(β̃) (B) Var(β̂)>Var(β̃) (C) Var(β̂)< or >Var(β̃) (D) Var(β̂)=Var(β̃)

Also written as: Let beta_hat be the OLS slope on X_1 from regressing Y on X_1 alone, and beta_tilde the coefficient on X_1 from regressing Y on X_1 and X_2. Then

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.

TestStop has 7 past-paper questions on this subtopic.

Practise Misspecification and measurement errorMore on Irrelevant variables and functional-form misspecification

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Question from the DSE 2015 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.