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OLS: y=10+1.3X1+2.1X2+0.2X3+ui if OLS estimator is problematic because X1 is endogenous, what assumption of linear regression...

OLS: y=10+1.3X1+2.1X2+0.2X3+ui

if OLS estimator is problematic because X1 is endogenous, what assumption of linear regression would be invalid and what's wrong with using OLS

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Answer #1

Following the assumption of linear regression would be invalid:

All independent variables are uncorrelated with the error term

Violation of such assumption imply that there exists a correlation between one of the independent variable and the error term and the independency of variables is questioned.

If we still use OLS, then the coefficient obtained will be inconsistent and biased. There will be a high chance of presence of Omitted Variable Bias. Standard hypothesis tests will become unreliable in such cases.

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