Pooled OLS models are biased when:
A) When the fixed effects are correlated with the independent variable.
B) When the fixed effects are correlated with the dependent variable.
C) When the fixed effects model is used when in reality there are no fixed effects in the data.
D) When we don't know the direction of the fixed effects.

Question

Quizplus · Accepted Answer

Pooled OLS models assume that the fixed effects are uncorrelated with the independent variables. If there is a correlation, then the estimates can be biased. This is known as the omitted variable bias. Therefore, option A is the correct choice.

Pooled OLS Models Are Biased When