Simultaneity
Selection bias
• Very similar to omitted variable bias
• We suppose there is some unobservable characteristic that influences both the level of the dependent variable y and of the explanatory variable x
• This unobservable characteristic forms part of the error term ", causing (in the same manner as an omitted variable)
• Example: unobserved ability in the regression estimating the impact of education on wages • Example:
•
•
•
• where
• QD – quantity demanded
• QS – quantity supplied
• P – price
• I – income
• Endogeneity of price: it is determined from the interaction of supply and demand
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