Specification Error and Bias
Specification error occurs when an independent variable is correlated with the error term. There are several different causes of specification error:
- incorrect functional form
- a variable omitted from the model may have a relationship with both the dependent variable and one or more of the independent variables (omitted-variable bias);
- an irrelevant variable may be included in the model
- the dependent variable may be part of a system of simultaneous equations (simultaneity bias)
- measurement errors may affect the independent variables.
Read more about this topic: Specification (regression)
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