Potential omitted variable bias is best dealt with by
A)performing tests of individual significance.
B)carefully considering economic theory.
C)including all possible independent variables.
D)performing tests of joint significance.

Question

Quizplus · Accepted Answer

Omitted variable bias occurs when a relevant independent variable is missing in a regression equation, which can affect the accuracy of the estimated coefficient of the included variables. Therefore, the best way to deal with this bias is to carefully consider economic theory and include all relevant variables in the regression model. A careful consideration of theory can help identify variables that are likely to be omitted, and including those variables in the model can help control for their effect on the dependent variable. Performing tests of individual or joint significance may help identify the statistical significance of the included variables, but they do not necessarily address the issue of omitted variable bias.

Potential Omitted Variable Bias Is Best Dealt with by