The determining function that drives share of accepted job offers for a company is given by the following equation: AcceptedOffers_t = α₀ + α₁StartingSalary_t + α₂EconomicClimate_t + U_t, where the unit of observation is particular month (t). Suppose one wanted to use the national unemployment rate (unemployment_t) as a proxy for EconomicClimate (i.e., ran the above regression replacing the UnemploymentRate with EconomicClimate). How should we interpret the estimated coefficient on the UnemploymentRate (i.e., the proxy variable)? A) A good estimate for α₂ in the above determining function. B) A good estimate for α₁ in the above determining function. C) A good estimate for α₁ + α₂ in the above determining function. D) None of the answers is correct.

Question

Quizplus · Accepted Answer

The estimated coefficient on the UnemploymentRate as a proxy for EconomicClimate would not directly provide a good estimate for any specific coefficient (α) in the original equation. The relationship between unemployment and the economic climate is complex and may not linearly translate to the effects captured by the original EconomicClimate variable. Thus, using unemployment as a proxy could introduce bias or misinterpretation, making it incorrect to directly equate the estimated coefficient with any specific α coefficient in the original determining function.

The Determining Function That Drives Share of Accepted Job Offers