Question

In which of the following situations would one be most comfortable that omitted variable bias is...

In which of the following situations would one be most comfortable that omitted variable bias is not a concern?
a. When all of the variables in a model are statistically significant
b. When an estimated model has a high R-squared.
c. When an estimated model has a high adjusted R-squared.
d. When no one in a room full of experts can think of a variable that was not included in the model that could be causing omitted variable bias

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Answer #1

Regression gives biased results when an important variable is omitted. It happens due to misspecification of a linear specification model. The effect may be an overestimation, or, underestimation. The omitted variable must be correlated with a dependent variable, and, one or more of independent variables.

High R-Squared, or, adjusted R squared does not mean that there is no omitted variable bias.

a) It is not a concern when all variables are statistically significant.

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