Consider the following simple regression model y = β₀ + β₁x₁ + u. Suppose Corr(x,u) 0, Corr(z,x) 0, and Corr(z,u)

Question

Consider the following simple regression model y = β₀ + β₁x₁ + u. Suppose Corr(x,u) > 0, Corr(z,x) > 0, and Corr(z,u) < 0. Then, the IV estimator has a(n) _____. A)downward bias B)asymptotic bias C)upward bias D)substantial bias

Quizplus · Accepted Answer

The IV estimator has a downward bias because the correlation between x and u is positive, the correlation between z and x is positive, and the correlation between z and u is negative. This means that the IV estimator will tend to underestimate the true value of β₁.

Consider the Following Simple Regression Model Y = β0

Consider the Following Simple Regression Model Y = β₀