An omitted variable bias problem occurs when:
A) We fail to include an independent variable that is not correlated with the dependent variable but is correlated with the main independent variable of interest.
B) We fail to include an independent variable that is correlated with the main independent variable of interest and the error term.
C) We fail to include the main independent variable of interest in the model.
D) We fail to include an independent variable that is correlated with the error term but is not correlated with the main independent variable of interest.

Question

Quizplus · Accepted Answer

Omitted variable bias occurs when we fail to include an independent variable in the model that is correlated with both the dependent variable and the main independent variable of interest, but is not included in the model. This leads to a spurious correlation between the main independent variable and the dependent variable, as the omitted variable is also affecting the dependent variable. In other words, the coefficient of the main independent variable is biased due to the omitted variable. Option B describes this situation.

An Omitted Variable Bias Problem Occurs When