For W to be an effective control variable in IV estimation, the following condition must hold A)E(u_i)= 0 B)E(u_i|Z_i,W_i)= E(u_i|W_i) C)E(u_iu_j)≠ 0 D)there must be an intercept in the regression

Question

Quizplus · Accepted Answer

In order for W to be an effective control variable in IV estimation, it must be uncorrelated with the error term in the first stage regression, represented by E(u_i|Z_i,W_i)= E(u_i|W_i), where Z represents the set of instrumental variables. This ensures that W satisfies the exogeneity assumption and is a valid control variable in the second stage regression. The other options do not accurately describe the conditions necessary for W to be an effective control variable.

For W to Be an Effective Control Variable in IV