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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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