Ordinary least squares estimation is subject to heterogeneity bias if _____.
A)the regression model exhibits heteroskedasticty
B)the unobserved effect is correlated with the observed explanatory variables
C)the regression model includes a lagged dependent variable
D)the explanatory variables do not change over time

Question

Quizplus · Accepted Answer

Heterogeneity bias occurs when the unobserved effect (such as individual heterogeneity) is correlated with the observed explanatory variables. This causes the OLS estimator to be biased and inconsistent. The other options are not related to heterogeneity bias.

Ordinary Least Squares Estimation Is Subject to Heterogeneity Bias If