Endogeniety

Endogeniety simply means that a parameter or variable is correlated with the error term. There are many reasons why this would happen:

1. Measurement error
• This happens when we do not have an accurate measure of the independent variables.
2. Omitted variables
• This happens when the model does not include all the variables it should, and thus we have an uncontrolled variable.
3. Simultaneity
• This happens when two variables are each affecting the other.

To address endogeniety, there are a few options:

• Use instrumental variables address omitted variables
• Heckman correction models address the sampling bias and unobservable variables
• If the data is not a panel, then propensity score matching could help a small sample
• Run a 2SLS or 3SLS

(Adapted from course notes)

(Flashcards and other resources here)