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Endogeneity (econometrics)

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1372: 25: 1105: 2038: 2258: 1367:{\displaystyle {\begin{aligned}y_{i}&=\alpha +\beta (x_{i}-\nu _{i})+\varepsilon _{i}\\y_{i}&=\alpha +\beta x_{i}+(\varepsilon _{i}-\beta \nu _{i})\\y_{i}&=\alpha +\beta x_{i}+u_{i}\quad ({\text{where }}u_{i}=\varepsilon _{i}-\beta \nu _{i})\end{aligned}}} 2288: − 1. Suppose that the level of pest infestation is independent of all other factors within a given period, but is influenced by the level of rainfall and fertilizer in the preceding period. In this instance it would be correct to say that infestation is 1833: 2429:
model, when predicting the quantity demanded in equilibrium, the price is endogenous because producers change their price in response to demand and consumers change their demand in response to price. In this case, the price variable is said to have
304:, a variable that is correlated with both the independent variable in the model and with the error term. (Equivalently, the omitted variable affects the independent variable and separately affects the dependent variable.) 1110: 1094: 1694: 1607: 386: 481: 2131: 540: 2033:{\displaystyle z_{i}={\frac {\beta _{2}+\gamma _{2}\beta _{1}}{1-\gamma _{1}\gamma _{2}}}x_{i}+{\frac {1}{1-\gamma _{1}\gamma _{2}}}v_{i}+{\frac {\gamma _{2}}{1-\gamma _{1}\gamma _{2}}}u_{i}} 1825: 997: 1749: 676: 716: 939: 1456: 1024: 2377: 2341: 899: 839: 759: 214: 194: 1476: 859: 779: 234: 2123: 2096: 2069: 1776: 1506: 1429: 1402: 567: 416: 879: 819: 799: 739: 696: 650: 630: 610: 590: 129:. The problem of endogeneity is often ignored by researchers conducting non-experimental research and doing so precludes making policy recommendations. 43: 418:
is omitted from the regression model (perhaps because there is no way to measure it directly). Then the model that is actually estimated is
1032: 2253:{\displaystyle \operatorname {E} (z_{i}u_{i})={\frac {\gamma _{2}}{1-\gamma _{1}\gamma _{2}}}\operatorname {E} (u_{i}u_{i})\neq 0} 1613: 1526: 313: 424: 2693: 2638: 2619: 2480: 2406: 489: 2396: 106: 75: 2666: 2590: 2514: 61: 2387:
Generally speaking, simultaneity occurs in the dynamic model just like in the example of static simultaneity above.
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Besides simultaneity, correlation between explanatory variables and the error term can arise when an unobserved or
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Estimating either equation by itself results in endogeneity. In the case of the first structural equation,
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processes. It is common for some factors within a causal system to be dependent for their value in period
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When the explanatory variables are not stochastic, then they are strong exogenous for all the parameters.
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Suppose that a perfect measure of an independent variable is impossible. That is, instead of observing
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Suppose that two variables are codetermined, with each affecting the other according to the following
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Therefore, attempts at estimating either structural equation will be hampered by endogeneity.
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in the estimation leads to biased estimates as it violates the exogeneity assumption of the
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Antonakis, John; Bendahan, Samuel; Jacquart, Philippe; Lalive, Rafael (December 2010).
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is articulated in such a way that a variable or variables is exogenous for parameter
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both independent and dependent variables, or when independent variables are
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once the demand and supply curves are known. In contrast, a change in
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Endogeneity: An inconvenient truth. Podcast with Prof. John Antonakis
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is the measurement error or "noise". In this case, a model given by
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The endogeneity problem is particularly relevant in the context of
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on the values of other factors in the causal system in period
1089:{\displaystyle y_{i}=\alpha +\beta x_{i}^{*}+\varepsilon _{i}} 1689:{\displaystyle z_{i}=\beta _{2}x_{i}+\gamma _{2}y_{i}+v_{i}} 1602:{\displaystyle y_{i}=\beta _{1}x_{i}+\gamma _{1}z_{i}+u_{i}} 381:{\displaystyle y_{i}=\alpha +\beta x_{i}+\gamma z_{i}+u_{i}} 258:
model then the estimate of the regression coefficient in an
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can be written in terms of observables and error terms as
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In this case, the endogeneity comes from an uncontrolled
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techniques are commonly used to mitigate this problem.
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The following are some common sources of endogeneity.
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may be too technical for most readers to understand
2633:(Sixth ed.). Malden: Blackwell. p. 139. 2371: 2335: 2252: 2117: 2090: 2063: 2032: 1819: 1770: 1743: 1688: 1601: 1500: 1470: 1450: 1423: 1396: 1366: 1088: 1018: 991: 933: 893: 873: 853: 833: 813: 793: 773: 753: 733: 710: 690: 670: 644: 624: 604: 584: 561: 534: 475: 410: 380: 228: 208: 188: 2657:(Second ed.). New York: MacMillan. pp.  2505:(Second ed.). New York: MacMillan. pp.  2359:is strongly/strictly exogenous for the parameter 121:from variables which are predetermined. Ignoring 2715: 1458:, they are correlated, so the OLS estimation of 307:Assume that the "true" model to be estimated is 196:. Even if a variable is exogenous for parameter 151: 2614:(Sixth ed.). Upper Saddle River: Pearson. 1820:{\displaystyle 1-\gamma _{1}\gamma _{2}\neq 0} 1481:Measurement error in the dependent variable, 569:term has been absorbed into the error term). 2473:Introductory Econometrics: A Modern Approach 2470: 93:broadly refers to situations in which an 62:Learn how and when to remove this message 46:, without removing the technical details. 2709:Seth Godin's simple views on endogeneity 2571: 992:{\displaystyle x_{i}=x_{i}^{*}+\nu _{i}} 74:For the concept in economic theory, see 2628: 216:, it might be endogenous for parameter 2716: 2647: 2609: 2495: 2323:is sequential exogenous for parameter 44:make it understandable to non-experts 904: 18: 2407:Dependent and independent variables 1744:{\displaystyle E(z_{i}u_{i})\neq 0} 289: 117:whose values are determined by the 13: 2603: 2397:Virtuous circle and vicious circle 2212: 2135: 698:is correlated with the error term 107:endogenous and exogenous variables 76:Exogenous and endogenous variables 14: 2750: 2676: 2382: 2267: 281: 23: 2471:Wooldridge, Jeffrey M. (2009). 1511: 1309: 941:, what is actually observed is 2565: 2523: 2489: 2464: 2419: 2241: 2218: 2164: 2141: 1732: 1709: 1357: 1310: 1253: 1224: 1165: 1139: 1: 2457: 671:{\displaystyle \gamma \neq 0} 152:Exogeneity versus endogeneity 111:simultaneous equations models 2695:Lecture on Simultaneity Bias 2551:10.1016/j.leaqua.2010.10.010 2412: 711:{\displaystyle \varepsilon } 276:Heckman selection correction 80:Endogeneity (disambiguation) 7: 2610:Greene, William H. (2012). 2390: 10: 2755: 293: 105:. The distinction between 73: 2425:For example, in a simple 1478:will be biased downward. 934:{\displaystyle x_{i}^{*}} 2654:Elements of Econometrics 2539:The Leadership Quarterly 2502:Elements of Econometrics 1451:{\displaystyle \nu _{i}} 1019:{\displaystyle \nu _{i}} 170:strong/strict exogeneity 2631:A Guide to Econometrics 2629:Kennedy, Peter (2008). 2372:{\displaystyle \alpha } 2336:{\displaystyle \alpha } 2292:within the period, but 894:{\displaystyle \gamma } 834:{\displaystyle \alpha } 754:{\displaystyle \alpha } 209:{\displaystyle \alpha } 189:{\displaystyle \alpha } 16:Concept in econometrics 2373: 2337: 2254: 2119: 2098:are uncorrelated with 2092: 2065: 2034: 1821: 1772: 1745: 1690: 1603: 1518:"structural" equations 1502: 1472: 1471:{\displaystyle \beta } 1452: 1425: 1398: 1368: 1090: 1020: 993: 935: 895: 875: 855: 854:{\displaystyle \beta } 835: 815: 801:, the distribution of 795: 775: 774:{\displaystyle \beta } 755: 735: 712: 692: 672: 646: 626: 606: 586: 572:If the correlation of 563: 536: 477: 412: 382: 260:ordinary least squares 230: 229:{\displaystyle \beta } 210: 190: 113:, where one separates 78:. For other uses, see 2374: 2338: 2255: 2120: 2118:{\displaystyle u_{i}} 2093: 2091:{\displaystyle v_{i}} 2066: 2064:{\displaystyle x_{i}} 2035: 1822: 1773: 1771:{\displaystyle z_{i}} 1746: 1691: 1604: 1503: 1501:{\displaystyle y_{i}} 1473: 1453: 1426: 1424:{\displaystyle u_{i}} 1399: 1397:{\displaystyle x_{i}} 1369: 1091: 1021: 994: 936: 896: 876: 856: 836: 816: 796: 776: 756: 741:is not exogenous for 736: 713: 693: 673: 647: 627: 607: 587: 564: 562:{\displaystyle z_{i}} 537: 478: 413: 411:{\displaystyle z_{i}} 383: 296:Omitted-variable bias 294:Further information: 272:instrumental variable 231: 211: 191: 166:sequential exogeneity 131:Instrumental variable 2612:Econometric Analysis 2363: 2355:, then the variable 2327: 2132: 2102: 2075: 2048: 1834: 1782: 1778:while assuming that 1755: 1703: 1614: 1527: 1485: 1462: 1435: 1408: 1381: 1106: 1033: 1003: 945: 913: 885: 865: 845: 825: 821:depends not only on 805: 785: 765: 745: 725: 702: 682: 656: 636: 616: 596: 576: 546: 490: 425: 395: 314: 302:confounding variable 262:(OLS) regression is 244:independent variable 220: 200: 180: 160:, the notion of the 127:Gauss–Markov theorem 95:explanatory variable 2578:Econometric Methods 1072: 975: 930: 632:separately affects 146:measured with error 2734:Econometric models 2369: 2333: 2319:. If the variable 2250: 2115: 2088: 2061: 2030: 1817: 1768: 1741: 1686: 1599: 1498: 1468: 1448: 1421: 1394: 1364: 1362: 1086: 1058: 1016: 989: 961: 931: 916: 891: 871: 851: 831: 811: 791: 771: 751: 731: 708: 688: 668: 642: 622: 602: 582: 559: 532: 473: 408: 378: 226: 206: 186: 2739:Corporate finance 2729:Estimation theory 2640:978-1-4051-8257-7 2621:978-0-13-513740-6 2482:978-0-324-66054-8 2432:total endogeneity 2427:supply and demand 2353:the Granger sense 2299:Let the model be 2210: 2018: 1963: 1915: 1316: 905:Measurement error 874:{\displaystyle z} 814:{\displaystyle y} 794:{\displaystyle x} 734:{\displaystyle x} 691:{\displaystyle x} 645:{\displaystyle y} 625:{\displaystyle z} 605:{\displaystyle z} 585:{\displaystyle x} 72: 71: 64: 2746: 2696: 2685: 2672: 2644: 2625: 2597: 2596: 2569: 2563: 2562: 2545:(6): 1086–1120. 2536: 2527: 2521: 2520: 2493: 2487: 2486: 2468: 2451: 2423: 2378: 2376: 2375: 2370: 2342: 2340: 2339: 2334: 2259: 2257: 2256: 2251: 2240: 2239: 2230: 2229: 2211: 2209: 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138:omitted variable 67: 60: 56: 53: 47: 27: 26: 19: 2754: 2753: 2749: 2748: 2747: 2745: 2744: 2743: 2714: 2713: 2694: 2683: 2679: 2669: 2641: 2622: 2606: 2604:Further reading 2601: 2600: 2593: 2570: 2566: 2534: 2528: 2524: 2517: 2494: 2490: 2483: 2469: 2465: 2460: 2455: 2454: 2424: 2420: 2415: 2393: 2385: 2364: 2361: 2360: 2347:does not cause 2328: 2325: 2324: 2270: 2235: 2231: 2225: 2221: 2203: 2199: 2193: 2189: 2182: 2176: 2172: 2170: 2158: 2154: 2148: 2144: 2133: 2130: 2129: 2109: 2105: 2103: 2100: 2099: 2082: 2078: 2076: 2073: 2072: 2055: 2051: 2049: 2046: 2045: 2024: 2020: 2011: 2007: 2001: 1997: 1990: 1984: 1980: 1978: 1969: 1965: 1956: 1952: 1946: 1942: 1935: 1930: 1921: 1917: 1908: 1904: 1898: 1894: 1887: 1880: 1876: 1870: 1866: 1857: 1853: 1852: 1850: 1841: 1837: 1835: 1832: 1831: 1805: 1801: 1795: 1791: 1783: 1780: 1779: 1762: 1758: 1756: 1753: 1752: 1726: 1722: 1716: 1712: 1704: 1701: 1700: 1680: 1676: 1667: 1663: 1657: 1653: 1644: 1640: 1634: 1630: 1621: 1617: 1615: 1612: 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Solving for 1740: 1737: 1734: 1729: 1725: 1719: 1715: 1711: 1708: 1697: 1696: 1683: 1679: 1675: 1670: 1666: 1660: 1656: 1652: 1647: 1643: 1637: 1633: 1629: 1624: 1620: 1609: 1596: 1592: 1588: 1583: 1579: 1573: 1569: 1565: 1560: 1556: 1550: 1546: 1542: 1537: 1533: 1513: 1510: 1495: 1491: 1467: 1445: 1441: 1418: 1414: 1391: 1387: 1375: 1374: 1359: 1354: 1350: 1346: 1343: 1338: 1334: 1330: 1325: 1321: 1312: 1306: 1302: 1298: 1293: 1289: 1285: 1282: 1279: 1276: 1273: 1271: 1267: 1263: 1259: 1258: 1255: 1250: 1246: 1242: 1239: 1234: 1230: 1226: 1223: 1218: 1214: 1210: 1207: 1204: 1201: 1198: 1196: 1192: 1188: 1184: 1183: 1178: 1174: 1170: 1167: 1162: 1158: 1154: 1149: 1145: 1141: 1138: 1135: 1132: 1129: 1126: 1124: 1120: 1116: 1112: 1111: 1097: 1096: 1083: 1079: 1075: 1070: 1065: 1061: 1057: 1054: 1051: 1048: 1043: 1039: 1013: 1009: 986: 982: 978: 973: 968: 964: 960: 955: 951: 928: 923: 919: 906: 903: 890: 870: 850: 830: 810: 790: 770: 750: 730: 707: 687: 667: 664: 661: 641: 621: 601: 581: 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2275: 2265: 2247: 2244: 2236: 2232: 2226: 2222: 2215: 2204: 2200: 2194: 2190: 2186: 2183: 2177: 2173: 2167: 2159: 2155: 2149: 2145: 2138: 2128: 2127: 2126: 2110: 2106: 2083: 2079: 2056: 2052: 2025: 2021: 2012: 2008: 2002: 1998: 1994: 1991: 1985: 1981: 1975: 1970: 1966: 1957: 1953: 1947: 1943: 1939: 1936: 1932: 1927: 1922: 1918: 1909: 1905: 1899: 1895: 1891: 1888: 1881: 1877: 1871: 1867: 1863: 1858: 1854: 1847: 1842: 1838: 1830: 1829: 1828: 1814: 1811: 1806: 1802: 1796: 1792: 1788: 1785: 1763: 1759: 1738: 1735: 1727: 1723: 1717: 1713: 1706: 1681: 1677: 1673: 1668: 1664: 1658: 1654: 1650: 1645: 1641: 1635: 1631: 1627: 1622: 1618: 1610: 1594: 1590: 1586: 1581: 1577: 1571: 1567: 1563: 1558: 1554: 1548: 1544: 1540: 1535: 1531: 1523: 1522: 1521: 1519: 1509: 1493: 1489: 1479: 1465: 1443: 1439: 1416: 1412: 1389: 1385: 1352: 1348: 1344: 1341: 1336: 1332: 1328: 1323: 1319: 1304: 1300: 1296: 1291: 1287: 1283: 1280: 1277: 1274: 1272: 1265: 1261: 1248: 1244: 1240: 1237: 1232: 1228: 1221: 1216: 1212: 1208: 1205: 1202: 1199: 1197: 1190: 1186: 1176: 1172: 1168: 1160: 1156: 1152: 1147: 1143: 1136: 1133: 1130: 1127: 1125: 1118: 1114: 1102: 1101: 1100: 1081: 1077: 1073: 1068: 1063: 1059: 1055: 1052: 1049: 1046: 1041: 1037: 1029: 1028: 1027: 1011: 1007: 984: 980: 976: 971: 966: 962: 958: 953: 949: 926: 921: 917: 902: 888: 868: 848: 828: 808: 788: 768: 748: 728: 719: 705: 685: 665: 662: 659: 639: 619: 612:is not 0 and 599: 579: 570: 554: 550: 527: 523: 519: 514: 510: 506: 503: 498: 494: 468: 464: 460: 455: 451: 447: 444: 441: 438: 433: 429: 421: 420: 419: 403: 399: 373: 369: 365: 360: 356: 352: 349: 344: 340: 336: 333: 330: 327: 322: 318: 310: 309: 308: 305: 303: 297: 287: 282:Static models 279: 277: 273: 269: 265: 261: 257: 253: 249: 245: 240: 237: 223: 203: 183: 175: 171: 167: 163: 159: 149: 147: 143: 139: 134: 132: 128: 124: 120: 116: 112: 108: 104: 100: 96: 92: 88: 81: 77: 66: 63: 55: 45: 41: 35: 32:This article 30: 21: 20: 2653: 2630: 2611: 2577: 2567: 2542: 2538: 2525: 2501: 2491: 2472: 2466: 2448:demand curve 2442:would be an 2431: 2421: 2386: 2383:Simultaneity 2356: 2348: 2344: 2320: 2316: 2312: 2308: 2304: 2300: 2298: 2285: 2281: 2276:analysis of 2271: 2263: 2043: 1698: 1515: 1512:Simultaneity 1480: 1376: 1098: 908: 720: 571: 485: 390: 306: 299: 285: 241: 238: 173: 169: 165: 161: 155: 135: 123:simultaneity 90: 87:econometrics 84: 58: 52:January 2023 49: 33: 2649:Kmenta, Jan 2497:Kmenta, Jan 2440:preferences 2296:over time. 2274:time series 1827:results in 1377:Since both 1315:where  542:(thus, the 142:confounding 91:endogeneity 2718:Categories 2704:Mark Thoma 2458:References 2438:tastes or 2294:endogenous 1431:depend on 268:consistent 256:regression 252:error term 248:correlated 174:Exogeneity 103:error term 99:correlated 2724:Causality 2559:1048-9843 2444:exogenous 2413:Footnotes 2367:α 2331:α 2290:exogenous 2245:≠ 2216:⁡ 2201:γ 2191:γ 2187:− 2174:γ 2139:⁡ 2009:γ 1999:γ 1995:− 1982:γ 1954:γ 1944:γ 1940:− 1906:γ 1896:γ 1892:− 1878:β 1868:γ 1855:β 1812:≠ 1803:γ 1793:γ 1789:− 1736:≠ 1655:γ 1632:β 1568:γ 1545:β 1466:β 1440:ν 1349:ν 1345:β 1342:− 1333:ε 1284:β 1278:α 1245:ν 1241:β 1238:− 1229:ε 1209:β 1203:α 1173:ε 1157:ν 1153:− 1137:β 1131:α 1078:ε 1069:∗ 1056:β 1050:α 1008:ν 981:ν 972:∗ 927:∗ 889:γ 849:β 829:α 769:β 749:α 706:ε 663:≠ 660:γ 652:(meaning 507:γ 495:ε 465:ε 448:β 442:α 353:γ 337:β 331:α 250:with the 224:β 204:α 184:α 115:variables 101:with the 2651:(1986). 2575:(1972). 2499:(1986). 2436:consumer 2391:See also 678:), then 2700:YouTube 2689:YouTube 2659:651–733 2583:267–291 2311:,  242:If the 38:Please 2665:  2637:  2618:  2589:  2557:  2513:  2507:652–53 2479:  2343:, and 2278:causal 999:where 721:Here, 486:where 264:biased 2535:(PDF) 254:in a 156:In a 119:model 2663:ISBN 2635:ISBN 2616:ISBN 2587:ISBN 2555:ISSN 2511:ISBN 2477:ISBN 2071:and 1404:and 881:and 841:and 761:and 592:and 391:but 2702:by 2698:on 2687:on 2547:doi 2351:in 246:is 140:is 97:is 85:In 42:to 2720:: 2661:. 2585:. 2553:. 2543:21 2541:. 2537:. 2509:. 2379:. 2125:, 1520:: 901:. 718:. 278:. 236:. 168:, 164:, 148:. 89:, 2671:. 2643:. 2624:. 2595:. 2561:. 2549:: 2519:. 2485:. 2450:. 2357:x 2349:x 2345:y 2321:x 2317:u 2313:z 2309:x 2307:( 2305:f 2301:y 2286:t 2282:t 2260:. 2248:0 2242:) 2237:i 2233:u 2227:i 2223:u 2219:( 2213:E 2205:2 2195:1 2184:1 2178:2 2168:= 2165:) 2160:i 2156:u 2150:i 2146:z 2142:( 2136:E 2111:i 2107:u 2084:i 2080:v 2057:i 2053:x 2040:. 2026:i 2022:u 2013:2 2003:1 1992:1 1986:2 1976:+ 1971:i 1967:v 1958:2 1948:1 1937:1 1933:1 1928:+ 1923:i 1919:x 1910:2 1900:1 1889:1 1882:1 1872:2 1864:+ 1859:2 1848:= 1843:i 1839:z 1815:0 1807:2 1797:1 1786:1 1764:i 1760:z 1739:0 1733:) 1728:i 1724:u 1718:i 1714:z 1710:( 1707:E 1682:i 1678:v 1674:+ 1669:i 1665:y 1659:2 1651:+ 1646:i 1642:x 1636:2 1628:= 1623:i 1619:z 1595:i 1591:u 1587:+ 1582:i 1578:z 1572:1 1564:+ 1559:i 1555:x 1549:1 1541:= 1536:i 1532:y 1494:i 1490:y 1444:i 1417:i 1413:u 1390:i 1386:x 1358:) 1353:i 1337:i 1329:= 1324:i 1320:u 1311:( 1305:i 1301:u 1297:+ 1292:i 1288:x 1281:+ 1275:= 1266:i 1262:y 1254:) 1249:i 1233:i 1225:( 1222:+ 1217:i 1213:x 1206:+ 1200:= 1191:i 1187:y 1177:i 1169:+ 1166:) 1161:i 1148:i 1144:x 1140:( 1134:+ 1128:= 1119:i 1115:y 1082:i 1074:+ 1064:i 1060:x 1053:+ 1047:= 1042:i 1038:y 1012:i 985:i 977:+ 967:i 963:x 959:= 954:i 950:x 922:i 918:x 869:z 809:y 789:x 729:x 686:x 666:0 640:y 620:z 600:z 580:x 555:i 551:z 528:i 524:u 520:+ 515:i 511:z 504:= 499:i 469:i 461:+ 456:i 452:x 445:+ 439:= 434:i 430:y 404:i 400:z 374:i 370:u 366:+ 361:i 357:z 350:+ 345:i 341:x 334:+ 328:= 323:i 319:y 82:. 65:) 59:( 54:) 50:( 36:.

Index

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Exogenous and endogenous variables
Endogeneity (disambiguation)
econometrics
explanatory variable
correlated
error term
endogenous and exogenous variables
simultaneous equations models
variables
model
simultaneity
Gauss–Markov theorem
Instrumental variable
omitted variable
confounding
measured with error
stochastic model
independent variable
correlated
error term
regression
ordinary least squares
biased
consistent
instrumental variable
Heckman selection correction
Omitted-variable bias

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