Question

What would you suggest to reduce the variance of data as an economist?

I need a clean and complete answer please for my Econometrics class 222. Main subjects are : simple linear regression model, interval estimation and hypothesis testing and modelling issues ,predicion and goodness to fit .

Answer 1

There is a bias-variance trade-off in economics. Lower variance increases bias of the estimated parameter. Increasing sample size reduces variability but also reduces degrees of freedom. Also, CLRM assumes more variability in the explanatory variable is good for estimation.

Therefore you can use increase of sample size approach to reduce variability but be careful. increasing sample size increases the goodness of fit, in that case, you have to use adjusted goodness o fit .