23A_IV_handout - Endogeneity - I 73-261 Econometrics...

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Unformatted text preview: Endogeneity - I 73-261 Econometrics October 18 Reading: Wooldridge 15, 3.3, 9.4-5 p. 2 CMU / Y. Kryukov 73-261 2.3 Endogeneity Overview Topic 2: Problems and Fixes Problem: Endogeneity X correlated with u Missing variables, Measurement error Selection issues, true simultaneity Consequence: bias Reduces or increases effect of a variable Could create significance Fix: Instrumental variables p. 3 CMU / Y. Kryukov 73-261 2.3 Endogeneity Endogeneity: definitions Violation of Assumption 4 E[ u | x ] . . . cov( u , x ) x is affected by u x is (partially) determined within the model Hence, x is endogenous u is affected by (included) x s x has indirect effect . . . . . . . . . Omitted variable (next slide) p. 4 CMU / Y. Kryukov 73-261 2.3 Endogeneity Omitted variable setup True model: y = + 1 x 1 + 2 x 2 + u () x 1 and x 2 are correlated: x 2 = + 1 x 1 + e Let v = 2 x 2 + u , then () becomes y = . . . . . . . . . () We do not observe x 2 So we estimate () ; note that cov( x 1 , v ) The estimate of 1 is 1 ~ e & u are independent of x p. 5 CMU / Y. Kryukov 73-261 2.3 Endogeneity Omitted variable - bias Lets compute the mean of : 1 ~ 2 1 , 1 , 1 ) ( ) )( ( E ~ E X X Y Y X X i i i = 2 1 , 1 1 1 , 1 1 1 , ) ( ) )( ( E X X V X V X X X...
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This note was uploaded on 01/21/2011 for the course ECON 73-261 taught by Professor Kyrkv during the Fall '09 term at Carnegie Mellon.

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23A_IV_handout - Endogeneity - I 73-261 Econometrics...

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