Bias of OLS Estimators due to Exclusion of Relevant Variables and Inclusion of Irrelevant Variables

• Autores: Deepankar Basu
• Localización: Oxford bulletin of economics and statistics, ISSN 0305-9049, Vol. 82, Nº. 1, 2020, págs. 209-234
• Idioma: inglés
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• Resumen

  • In this paper, I discuss three issues related to bias of OLS estimators in a general multivariate setting. First, I discuss the bias that arises from omitting relevant variables. I offer a geometric interpretation of such bias and derive sufficient conditions in terms of sign restrictions that allows us to determine the direction of bias. Second, I show that inclusion of some omitted variables will not necessarily reduce the magnitude of bias as long as some others remain omitted. Third, I show that inclusion of irrelevant variables in a model with omitted variables can also have an impact on the bias of OLS estimators. I use a running example of a simple wage regression to illustrate my arguments.