Given the model Crime_it=B₀+B₁Police_i,t+e_it, Which one of the following potential instrumental variables do you think would not satisfy the inclusion condition? A) The wealth of the city B) The population density of the city C) The number of guns in the city D) Number of candy stores in the city

Question

Quizplus · Accepted Answer

The inclusion condition requires that the instrumental variable be correlated with the endogenous variable (in this case, crime) only through its correlation with the instrumented variable (in this case, police presence). The number of candy stores in the city may not satisfy this condition and may be correlated with crime through other factors, such as socioeconomic status or urbanization. Therefore, D may not satisfy the inclusion condition. A, B, and C may satisfy the inclusion condition and could potentially be good instrumental variables.

Given the Model Crimeit=B0+B1Policei,t+eit

Given the Model Crime_it=B₀+B₁Police_i,t+e_it