Consider the following simple regression model y = β0 + β1x1 + u and z is an instrument for x. Suppose x and z are both positively correlated with u and Corr(z,x) > 0. Then, the asymptotic bias in the IV estimator is less than that for OLS only if:
A) Corr(z,u) / Corr(z,x) = Corr(x,u) .
B) Corr(z,u) / Corr(z,x) > Corr(x,u) .
C) Corr(z,u) / Corr(z,x) < Corr(x,u) .
D) Corr(z,u) / Corr(z,x) ≠ Corr(x,u) .
Correct Answer:
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