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September 28, 2006
Left-Out Variables
We considered the consequences of mistakenly leaving out a regressor.
Set up for the two-variable regression model:
Consider two possibilities:
If the truth is I and we pick I, we are in good shape:
An important proposition:
If the truth is II and we pick I, we have a left-out variable, which effectively becomes part of the error term.
We can derive an expression for the resulting left-out variable bias.
Posted by bparke at September 28, 2006 09:29 PM