Specification Biasa. Specification mistake - suppose an important variable, X2, is left out of the regression model. The truemodel is: 01122iiiiYXXubbb=+++But, you assume: 011iYXvaa=++(What CRM assumptions have been violated? Assumption #1 and Assumption #3.) b. What happens - Verbally. Your model assumes only X1causes Yto change, butin truth, the variable X2also causes Yto change. The effects of X2on Yare not accounted for in your model. As a result, the effect of X2Ygets tangled upwith the effect of X1Y. We can't get a clear picture of how changes in X1affect changes in Y. c. What happens - Mathematically. The estimator that you use is: 121ˆii1ix y= xa∑∑This will be biasedTo show this take the expected value of the estimator and use the
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This note was uploaded on 12/08/2011 for the course ECON 312 taught by Professor Daniellass during the Winter '10 term at UMass (Amherst).