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    Question

     Endogeneity in regression arises when:

    A Error term has zero mean Correct Answer Incorrect Answer
    B Independent variables are uncorrelated Correct Answer Incorrect Answer
    C Independent variables are correlated with error term Correct Answer Incorrect Answer
    D Multicollinearity exists Correct Answer Incorrect Answer

    Solution

    Solution: Endogeneity occurs if Cov(Xi,ui)≠0. Causes include omitted variables, measurement error, or simultaneous causality. OLS estimates become biased and inconsistent in presence of endogeneity. Instrumental variable (IV) methods can correct this.

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