Suppose that you are interested in estimating the causal effect of X on Y; however, you are worried that your right-hand-side variable X is endogenously determined with your outcome variable Y. Further suppose that you have another variable Z that has the potential to be a good instrumental variable for X. Which of the following statements best describes how an instrument Z can be used to identify the causal effect of Xon Y? The instrument Z can serve as a proxy for the omitted variable that is causing the endogeneity problem. O The instrument Z isolates the exogenous variation in X from the endogenous variation in X. O The instrument Z cannot be used to identify the casual effect of X on Y because there is no solution to the endogeneity problem. The instrument Z can act as an additional right-hand-side variable and control for the endogeneity problem.
Suppose that you are interested in estimating the causal effect of X on Y; however, you are worried that your right-hand-side variable X is endogenously determined with your outcome variable Y. Further suppose that you have another variable Z that has the potential to be a good instrumental variable for X. Which of the following statements best describes how an instrument Z can be used to identify the causal effect of Xon Y? The instrument Z can serve as a proxy for the omitted variable that is causing the endogeneity problem. O The instrument Z isolates the exogenous variation in X from the endogenous variation in X. O The instrument Z cannot be used to identify the casual effect of X on Y because there is no solution to the endogeneity problem. The instrument Z can act as an additional right-hand-side variable and control for the endogeneity problem.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that you are interested in estimating the causal effect of X on Y; however, you are
worried that your right-hand-side variable X is endogenously determined with your outcome
variable Y. Further suppose that you have another variable Z that has the potential to be a
good instrumental variable for X.
Which of the following statements best describes how an instrument Z can be used to identify
the causal effect of Xon Y?
The instrument Z can serve as a proxy for the omitted variable that is causing the endogeneity problem.
O The instrument Z isolates the exogenous variation in X from the endogenous variation in X.
The instrument Z cannot be used to identify the casual effect of X on Y because there is no solution to
the endogeneity problem.
The instrument Z can act as an additional right-hand-side variable and control for the endogeneity
problem.
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