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Author Question: The two conditions for instrument validity are corr(Zi, Xi) 0 and corr(Zi, ui) = 0. The reason for ... (Read 114 times)

BRWH

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on: Jun 29, 2018
The two conditions for instrument validity are corr(Zi, Xi)  0 and corr(Zi, ui) = 0. The reason for the inconsistency of OLS is that corr(Xi, ui)  0. But if X and Z are correlated, and X and u are also correlated, then how can Z and u not be correlated?

Question 2

Earnings functions, whereby the log of earnings is regressed on years of education, years of on the job training, and individual characteristics, have been studied for a variety of reasons.


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Zebsrer

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Reply #1 on: Jun 29, 2018
Answer to Question 1



Answer to Question 2



BRWH

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Reply #2 on: Jun 29, 2018
Thank you :)


Zebsrer

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Reply #3 on: Jun 29, 2018
Happy to help you


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