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Econometrics

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Omitted Variable Bias Direction - HS Graduation Rates

EMETRC-BFZ9KP

Suppose high school graduate rates are a function of per student expenditures at the school and the poverty rate in the area in which the school is located:

$$graduate = \beta_{0} + \beta_{1} povrate + \beta_{2} expend + u$$

Suppose, however, that you naively estimate the following instead:

$$\tilde{graduate} = \tilde{\beta_{0}} + \tilde{\beta_{1}} povrate$$

What is the likely direction of the bias in the estimated parameter $\tilde{\beta_{1}}$?

A

upward (positive bias)

B

downward (negative bias)

C

There is likely no bias.