Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 4

Suppose that the model

satisfies the first four Gauss-Markov assumptions, where pctstck is the percentage of a worker’s pension invested in the stock market, funds is the number of mutual funds that the worker can choose from, and risktol is some measure of risk tolerance (larger risktol means the person has a higher tolerance for risk). If funds and risktol are positively correlated, what is the inconsistency in 1 the slope coefficient in the simple regression of pctstck on funds?

Step 1 of 2

According to the information given, a higher tolerance of risk means more willingness to invest in the stock market, so. Now by using the equation (5.5) of this textbook, for:

Here:

By assumption, funds and risktol are given to be positively correlated, so that. Also, ifhas a positive partial effect on the dependent variable pctstck, such that, then the inconsistency inis positive.